Oldenburg Discussion Papers in Economics No. V-436-21
University of Oldenburg, Department of Economics, Oldenburg
Besides temporal and spatial aggregation issues in the analysis of asymmetric response of retail gasoline prices, previous studies have also largely ignored parameter heterogeneity across fuel stations. This paper addresses the aggregation issues and the parameter homogeneity assumption by examining the responsiveness of stations to input cost changes using daily station-specific retail and wholesale gasoline prices for 12,613 geographically diverse stations. Based on individual station analysis using asymmetric error correction models, we find that 48% of stations engage in competitive pricing while the remaining 52% exhibit the rockets and feathers pricing pattern. Our findings suggest that the rockets and feathers phenomenon is a feature of individual stations and local market characteristics are important determinants. We also show that pooled panel regression techniques obscure the actual pricing pattern observed from station-level time series analysis.