Common knowledge reference price and asymmetric price adjustments

There is abundant empirical evidence showing that asymmetric price adjustments exist in a wide variety of markets. Prices tend to rise faster when costs rise, relative to the rate at which prices drop when costs fall. This paper argues that a common knowledge reference price - a government suggested...

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Bibliographic Details
Published in:Review of industrial organization 2010-09, Vol.37 (2), p.141-159
Main Authors: Hofstetter, Marc, Tovar, Jorge
Format: Article
Language:English
Subjects:
Asymmetry
Colombia
Cost analysis
Empirical research
Energy market
Market structure
Price formation
Price theory
Retail prices
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Summary:There is abundant empirical evidence showing that asymmetric price adjustments exist in a wide variety of markets. Prices tend to rise faster when costs rise, relative to the rate at which prices drop when costs fall. This paper argues that a common knowledge reference price - a government suggested retail price - eases the existence of asymmetric price adjustments in a scenario where costs are ever-increasing. Our analysis of the Colombian retail gasoline market suggests that when costs rise by more than the reference price, prices tend to rise more slowly relative to when costs grow by less than the reference price. Reprinted by permission of Springer
ISSN:0889-938X
DOI:10.1007/s11151-010-9261-9