Abstract:
We develop a tractable model of competitive price cycles where prices are chosen alternatingly and consumers have heterogenous information. The model yields sharp empirical predictions about price patterns, impact of captive consumers and pass-through. Using rich station-level price data from the German retail gasoline market, we test these predictions. Consistent with the model, we find price cycles, characterized by frequent small price cuts and infrequent sharp increases. These cycles shorten as costs rise and are more likely to be initiated by firms with more captive consumers. Pass-through of input costs is incomplete, in contrast to alternative theories.