Asymmetric cost transmission and market power in retail gasoline markets

Abstract

Estimating non-linear autoregressive distributed lag models, we establish shortrun cost pass-through in the Swedish retail gasoline market. Our findings reveal a slower correction of disequilibrium error in volume-adjusted prices compared to average pump prices, suggesting that oil companies are more focused on pricing on days and at stations with larger sales. Our results also suggest that earlier studies of pass-through using average prices underestimates the price asymmetry. Exploring heterogeneity in price responses we find that gasoline stations less exposed to local competition impose larger and more prolonged asymmetry on retail gasoline prices. Full-service stations have a higher and more prolonged asymmetry in pricing than automated self-service stations. Despite indicating only roughly three percent rise in consumer prices, this asymmetry accounts for nearly 40% of firms’ gross margins, carrying significant implications for market regulation and business strategies.