Review of Industrial Organization 20: 33–50, 2002.
© 2002 Kluwer Academic Publishers. Printed in the Netherlands.
Search Costs, Lags and Prices at the Pump
RONALD N. JOHNSON
Department of Agricultural Economics & Economics, Montana State University, Bozeman, MT
Abstract. Evidence is mounting that long lags and asymmetric price responses to changes in
wholesale prices are characteristic of many retail markets. Although long lags are often attributed
to search costs, little empirical evidence exists to support this claim. The analysis offered in this
paper compares price responses in gasoline and diesel markets in 15 U.S. cities. Search costs vary
across these two markets, and the evidence indicates a much faster response in the diesel market
where search costs are lower. Asymmetric responses, where prices rise faster than they fall, are also
evident in the data. While asymmetric responses have been attributed to oligopolistic behavior, the
arguments presented in this paper point to search theory as an alternative explanation.
Keywords: Asymmetric responses, lags, search costs.
How market prices adjust has been a long-standing concern of economists, and
there is now a substantial body of evidence indicating that retail prices typically
respond to changes in wholesale prices with substantial lags.
ments have been put forth to explain sticky prices and long lags. While search
costs are often mentioned, much of the discussion has focused on menu costs,
nominal contracts, coordination failure (ﬁrms are reluctant to change price until
other ﬁrms do so) and, of course, collusion. In the retail fuels market, however,
menu costs are essentially zero, and nominal contracts are absent. Moreover, this
market at least conveys the appearance of being highly competitive, making it an
excellent candidate for studying the impact of buyer search costs on lag lengths
and asymmetric price responses, a closely related issue.
Despite the fact that gasoline prices are typically posted in full view of custom-
ers, price dispersion exists, and search costs appear to contribute to that outcome.
I have beneﬁtted from comments on earlier drafts from David Buschena, Jerry Dwyer, George
Deltas, Sam Peltzman, Mike Maloney, and seminars at Clemson University (1999), University of
Arizona (2000), Federal Reserve Bank of Atlanta (2000), and the University of Calgary (2000).
Financial support was provided by the Earhart Foundation.
See, for example, Carlton (1989) and Blinder et al. (1998).
Howard Marvel (1976) provides empirical evidence that search costs are an important determ-
inate of price variability in retail gasoline markets.