Search Costs, Lags and Prices at the Pump

Search Costs, Lags and Prices at the Pump 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Industrial Organization Springer Journals

Search Costs, Lags and Prices at the Pump

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 2002 by Kluwer Academic Publishers
Subject
Economics; Industrial Organization; Microeconomics
ISSN
0889-938X
eISSN
1573-7160
D.O.I.
10.1023/A:1013364513064
Publisher site
See Article on Publisher Site

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.

Journal

Review of Industrial OrganizationSpringer Journals

Published: Oct 13, 2004

References

  • Search Costs and Price Dispersion in a Localized, Homogenous Product Market: Some Empirical Evidence
    Adams, F. A.
  • Information Costs, Pricing, and Resource Unemployment
    Alchian, A. A.

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