Sticky Prices, Inventories, and Market Power in Wholesale Gasoline Markets / Severin Borenstein, Andrea Shepard.

Format:

Book

Author/Creator:

Borenstein, Severin.

Contributor:

National Bureau of Economic Research.

Shepard, Andrea.

Series:

Working Paper Series (National Bureau of Economic Research) no. w5468.

NBER working paper series no. w5468

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1996.

Summary:

We present and test an explanation for lags in the adjustment of wholesale gasoline prices to changes in crude oil prices. Our simple model with costly adjustment of production and inventories implies that output prices will respond with a lag to cost shocks even in the absence of menu costs, imperfect information, and long-term buyer/seller relationships. The model predicts that futures prices for gasoline will adjust incompletely to crude oil price shocks occurring close to the expiration date of the futures contract. We test and confirm this implication. The model also predicts that firms with market power will choose a different price adjustment path than would perfectly competitive firms. We examine the responses of prices in 188 local wholesale gasoline markets and find evidence that greater market power leads to slower output price adjustment.

Notes:

Print version record

February 1996.