Asymmetric Price Adjustment and Consumer Search: An Examination of the Retail Gasoline Market

This article proposes a new explanation for why retail prices respond more quickly to cost increases than cost decreases. I develop a search model that assumes consumers’ expectations of prices are based on prices observed during previous purchases. This model predicts that consumers search less whe...

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Bibliographic Details
Published in:Journal of economics & management strategy 2011-06, Vol.20 (2), p.409-449
Main Author: Lewis, Matthew S.
Format: Article
Language:English
Subjects:
Consumers
Costs
Economic models
Energy market
Energy prices
Gasoline prices
Market structure
Oil market
Oil price
Petrol
Prices
Pricing policies
Retail prices
Retail trade
Studies
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Summary:This article proposes a new explanation for why retail prices respond more quickly to cost increases than cost decreases. I develop a search model that assumes consumers’ expectations of prices are based on prices observed during previous purchases. This model predicts that consumers search less when prices are falling, which results in higher profit margins and a slower price response to cost changes. I then empirically examine patterns of retail gasoline price response and price dispersion to show that this model predicts observed price behavior better than previously suggested explanations.
ISSN:1058-6407
1530-9134
DOI:10.1111/j.1530-9134.2011.00293.x