Common Knowledge Reference Price and Asymmetric Price Adjustments: Evidence from the Retail Gasoline Market in Colombia

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 r...

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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:
Adjustment
Asymmetry
Colombia
Consumer prices
Consumers
Cost estimation models
Costs
Economics
Economics and Finance
Empirical analysis
Gas stations
Gasoline
Gasoline prices
Governments
Industrial Organization
Market prices
Markets
Microeconomics
Monopolies
Price level changes
Price variance
Prices
Pricing policies
Regulation
Retail prices
Retail stores
Service stations
Studies
Subsidies
Wholesale prices
Wholesalers
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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.
ISSN:0889-938X
1573-7160
DOI:10.1007/s11151-010-9261-9