Working Paper Asymmetric Price Responses of Gasoline Stations: Evidence for Heterogeneity of Retailers

econstor www.econstor.eu Der Open-Access-Publkatonsserver der ZBW Lebnz-Informatonszentrum Wrtschaft The Open Access Publcaton Server of the ZBW Lebnz Informaton Centre for Economcs Faber, Remer P. Workng Paper Asymmetrc Prce Responses of Gasolne Statons: Evdence for Heterogenety of Retalers Tnbergen Insttute Dscusson Paper, No. 09-106/1 Provded n Cooperaton wth: Tnbergen Insttute, Amsterdam and Rotterdam Suggested Ctaton: Faber, Remer P. (2009) : Asymmetrc Prce Responses of Gasolne Statons: Evdence for Heterogenety of Retalers, Tnbergen Insttute Dscusson Paper, No. 09-106/1 Ths Verson s avalable at: http://hdl.handle.net/10419/86878 Standard-Nutzungsbedngungen: De Dokumente auf EconStor dürfen zu egenen wssenschaftlchen Zwecken und zum Prvatgebrauch gespechert und kopert werden. Se dürfen de Dokumente ncht für öffentlche oder kommerzelle Zwecke vervelfältgen, öffentlch ausstellen, öffentlch zugänglch machen, vertreben oder anderwetg nutzen. Sofern de Verfasser de Dokumente unter Open-Content-Lzenzen (nsbesondere CC-Lzenzen) zur Verfügung gestellt haben sollten, gelten abwechend von desen Nutzungsbedngungen de n der dort genannten Lzenz gewährten Nutzungsrechte. Terms of use: Documents n EconStor may be saved and coped for your personal and scholarly purposes. You are not to copy documents for publc or commercal purposes, to exhbt the documents publcly, to make them publcly avalable on the nternet, or to dstrbute or otherwse use the documents n publc. If the documents have been made avalable under an Open Content Lcence (especally Creatve Commons Lcences), you may exercse further usage rghts as specfed n the ndcated lcence. zbw Lebnz-Informatonszentrum Wrtschaft Lebnz Informaton Centre for Economcs

TI 2009-106/1 Tnbergen Insttute Dscusson Paper Asymmetrc Prce Responses of Gasolne Statons: Evdence for Heterogenety of Retalers Remer P. Faber Erasmus School of Economcs, Erasmus Unversty Rotterdam, and Tnbergen Insttute.

Tnbergen Insttute The Tnbergen Insttute s the nsttute for economc research of the Erasmus Unverstet Rotterdam, Unverstet van Amsterdam, and Vre Unverstet Amsterdam. Tnbergen Insttute Amsterdam Roetersstraat 31 1018 WB Amsterdam The Netherlands Tel.: +31(0)20 551 3500 Fax: +31(0)20 551 3555 Tnbergen Insttute Rotterdam Burg. Oudlaan 50 3062 PA Rotterdam The Netherlands Tel.: +31(0)10 408 8900 Fax: +31(0)10 408 9031 Most TI dscusson papers can be downloaded at http://www.tnbergen.nl.

ASYMMETRIC PRICE RESPONSES OF GASOLINE STATIONS: EVIDENCE FOR HETEROGENEITY OF RETAILERS 1 Remer P. Faber 2 November 10, 2009 Abstract. Ths paper studes asymmetrc prce responses of ndvdual frms, va daly retal prces of almost all gasolne statons n the Netherlands and suggested prces of the fve largest ol companes over more than two years. I fnd that 38% of the statons respond asymmetrcally to changes n the spot market prce. Hence, asymmetrc prcng s not a feature of the market as a whole, but of ndvdual frms. For asymmetrcally prcng statons, the asymmetry s substantal drectly after a change but dsappears after one or two days. I study staton-specfc characterstcs and conclude that asymmetrc prcng seems to be a phenomenon that s randomly dstrbuted across statons. I also fnd that none of the fve largest ol companes adust ther suggested prces asymmetrcally. Key Words: prce settng, asymmetrc prce responses, gasolne markets JEL code: D40, E31, L11, L81 1 I thank Maarten Janssen, Nck Vkander, and semnar partcpants at the Tnbergen Insttute for valuable comments. I thank Rkkert Nachtegaal for help wth the data. 2 Department of Economcs, Erasmus Unversty Rotterdam and Tnbergen Insttute. P.O. Box 1738, 3000 DR Rotterdam, The Netherlands. E-mal: faber@ese.eur.nl 1

1. Introducton Asymmetrc prce responses occur when prces rse more rapdly after an ncrease n costs than they declne after a decrease n costs (see Peltzman (2000)). Many polcy makers, consumers, and consumer organzatons are suspcous that ths prcng behavor s common n many markets, n partcular n agrcultural and gasolne retal markets. 1 Ths paper studes prce responses of gasolne statons and ol companes n the Netherlands and focuses on the prce settng and characterstcs of ndvdual frms. There already exsts a substantal lterature on asymmetrc prce responses. Frey and Manera (2007) provde a survey of the emprcal lterature. Some of these papers focus on gasolne retal markets. For example, Borensten, Cameron, and Glbert (1997) study the US gasolne market and fnd that semmonthly aggregated retal prces respond asymmetrcally to wholesale prce changes. Studes that use weekly data of ndvdual gasolne statons are Lews (2005) (420 statons), Verlnda (2008) (approxmately 90 statons), Balmaceda and Soruco (2008) (44 statons), and Hosken, McMllan, and Taylor (2008) (272 statons). The frst three studes report evdence at the market level for asymmetrc retal prce responses to spot market prce changes. 2 Deltas (2008) nvestgates asymmetry va monthly US state retal prces, Lews and Noel (2009) use daly cty retal prces, and Radchenko (2005) uses weekly natonal retal prces. These studes also fnd evdence of asymmetrc prce responses. For the Netherlands, Bettendorf, Van der Geest, and Varkevsser (2003) and Bettendorf, Van der Geest, and Kuper (2009) study the daly suggested prce of one ol company and fnd some evdence of asymmetrc prce responses to changes n the spot market prce. Asymmetrc prce responses are not consstent wth standard models of perfect competton or monopoly. Most theoretcal studes mark tact colluson and a low search ntensty as possble causes 1 See, for example, European Commsson, Food prces n Europe (December 9, 2008), De Consumentenbond, Supers woekeren met groente en frut (De Consumentengds, November 2008, pp. 32-33), De Consumentenbond, Pompprs volgt wereldmarkt (De Consumentengds, Aprl 2009, pp. 10-11), and De Telegraaf, Mythes over benzneprs zorgen voor veel onrust (September 19, 2008). 2 Noel (2009) uses twce-daly prces of 22 gasolne statons and fnds asymmetrc prcng at the market level. However, there also exst Edgeworth cycles n ths market. He shows that these cycles have an mpact on asymmetrc prcng. 2

for asymmetry. 3 To emprcally dstngush between these two causes s dffcult. Verlnda (2008) and Deltas (2008) conclude that market power can be an mportant factor for explanng asymmetry. 4 However, market power can explan asymmetry va both tact colluson (see Verlnda (2008)) and a low search ntensty (see Deltas (2008)). Radchenko (2005) explans asymmetry va volatlty of the nput prce (see also Peltzman (2000)) and fnds that tact colluson s a lkely explanaton. Almost all studes of asymmetrc prce adustments use (1) prce data that have a lower frequency than the frequency of prce decsons or nput cost changes (they use, for example, weekly data) or (2) data that are aggregated over large geographc areas (for example, an average natonal retal prce). 5 These data lmtatons possbly lead to based results (see also Geweke (2004)). Frst, to nvestgate asymmetrc prce responses t s mportant to have prce data wth a smlar frequency as the hghest frequency at whch prce decsons are taken or nput costs change. Only n ths case wll the analyss nclude all (possble) prce adustments. 6 Second, t s mportant to have data on prce decsons of ndvdual gasolne statons snce an ndvdual gasolne staton, and not the market as a whole, chooses to adust prces asymmetrcally or not. It may very well be that not all gasolne statons have the same prcng strategy, for example, because they do not operate under the same condtons (competton, ownershp structure, locaton, etc.). Moreover, even f all gasolne statons respond 3 See Johnson (2002), Lews (2005), Cabral and Fshman (2008), Deltas (2008), Yang and Ye (2008), and Tappata (2009) for an explanaton usng search costs. See Rotemberg and Saloner (1986), Haltwanger and Harngton (1991), Borensten and Shepard (1996), Borensten, Cameron, and Glbert (1997), Balke, Brown, and Yücel (1998), and Verlnda (2008) for an explanaton usng tact colluson. 4 Verlnda (2008) lnks characterstcs of gasolne statons to the exstence of asymmetrc prcng. He shows that brand dentty, proxmty to rval gasolne statons, and local market features and demographcs all have an mpact. Deltas (2008) concludes that US states wth hgher average margns have a hgher degree of asymmetry. However, Balmaceda and Soruco (2008) fnd that a group of branded statons and a group of statons wth a hgh margn have the same degree of asymmetry as respectvely a group of unbranded statons and a group of statons wth a low margn. 5 One excepton s Balmaceda and Soruco (2008), who use weekly retal and spot market prce data from Chle. Because of nsttutonal factors gasolne statons and the state-owned ol company adust prces only once a week. 6 Several papers report bases due to ths type of data lmtaton. Bachmeer and Grffn (2003) use weekly and daly spot market data and show that ther conclusons depend on the frequency of the data used. Noel (2009) shows that there may exst, next to asymmetrc prcng, other rregulartes n a market that have an mpact on asymmetrc prcng, but that cannot be observed n a low frequency data set. For example, the Edgeworth cycles that he fnds take approxmately one week. Eckert and West (2004) have a daly data set for a regon n Canada and conclude that a subset of weekly observatons s not suffcent for answerng ther research questons and can even be msleadng. Moreover, Bettendorf, Van der Geest, and Varkevsser (2003) have daly data on a suggested prce and estmate a separate model for each day of the week. For some days they fnd asymmetrc prces responses, for others not. These results show that data selecton may nfluence conclusons regardng asymmetrc prce responses. 3

asymmetrcally, t s possble that they do not all respond smlarly to cost changes (for example, the speed of adustment dffers). For these reasons aggregated prce data may have a summaton bas. Ths paper studes the daly prcng behavor of almost all gasolne statons and ol companes n the Netherlands over more than two years. Ol companes ssue natonal suggested prces for gasolne, but retal prces are decded at the staton level (see Faber and Janssen (2008)). I dsentangle three man questons: (1) To what degree do ol companes respond asymmetrcally to changes n the spot market prce? (2) To what degree do gasolne statons respond asymmetrcally to changes n the spot market prce and are there mportant dfferences between statons? (3) What knd of gasolne statons respond asymmetrcally? The frst two questons study whether there exsts heterogenety n the prcng behavor of frms and the thrd queston studes ths heterogenety. To answer these questons, I use a panel data set consstng of daly gasolne prces of about 3,600 gasolne statons and daly suggested prces of the fve largest ol companes over the perod May 30 2006 July 20 2008. By usng ths daly data set I can prevent possble estmaton bases, snce ol companes and almost all gasolne statons choose ther prces on a daly bass and nput costs for gasolne (the spot market prce) also change daly. Moreover, I have data on the characterstcs of ndvdual gasolne statons, so t s possble to look nto the characterstcs of statons that prce asymmetrcally. I fnd that none of the ol companes adust ther suggested prces asymmetrcally to changes n the spot market prce. I also fnd that there are sgnfcant dfferences between statons. Many statons do not prce asymmetrcally, but 38% of the statons do. Drectly after a cost shock, the extent of asymmetry s substantal for these statons. One day after a 1 cent ncrease n the spot market prce, the prce at statons that adust prces asymmetrcally rses on average by 0.346 cent. One day after a 1 cent decrease n the spot market prce, the prce at these statons decreases by 0.153 cent on average. So after one day there s on average an asymmetry of 0.193 cent. However, for most statons that adust prces asymmetrcally, the asymmetry only lasts a short perod of tme. For asymmetrcally prcng statons t takes on average about 10 days before the retal prce fully reflects the change n the 4

spot market prce. The asymmetrc part of ths transmsson process for most statons s drectly after the cost shock and lasts only 1 or 2 days. It s not clear why some gasolne statons set prces asymmetrcally and others do not. I look at 35 (sometmes overlappng) staton-specfc characterstcs that I assocate wth tact colluson and/or search ntensty (such as prce level, ownershp structure, and the number of close compettors). I do not fnd a clear pattern n the characterstcs of asymmetrcally prcng statons. Although I cannot fnd a clear explanaton for asymmetry, ths study mples that f there s an explanaton, t should be found at the ndvdual level, snce some statons do and others do not adust prces asymmetrcally. The contrbuton of ths study to the already large lterature on asymmetrc prce adustments s that t gves nsght n the prcng behavor of ndvdual frms on a daly bass. Ths study shows that asymmetry s not a feature of the market as a whole, but of ndvdual frms. For that reason the extent of asymmetry at the ndvdual level s hgher than the extent at the market level. I measure how many retalers adust prces asymmetrcally and study the dfferences between retalers. Up untl now, there s very lttle lterature on asymmetrc prcng by ndvdual retalers compared to the lterature on asymmetry at the market level. Moreover, few emprcal papers study characterstcs of asymmetrcally prcng retalers. Fnally, because of the detaled data set I can rule out a possble bas caused by aggregaton over ndvduals and mnmze a possble bas caused by aggregaton over tme. The conclusons that I draw n ths paper would not be possble wthout ths detaled data set. For example, the asymmetrc part of the transmsson process for most statons lasts only one or two days and takes place drectly after a cost shock. So wth weekly data the asymmetrc part of the transmsson process would have been unobserved. Ths paper s organzed as follows. Secton 2 descrbes the gasolne retal market and the data set. Each of the next three sectons consders one of the three research questons. Secton 3 studes whether ol companes adust ther suggested prces asymmetrcally. Secton 4 studes whether gasolne statons adust ther retal prces asymmetrcally. Secton 5 explores the characterstcs of asymmetrcally prcng statons. Secton 6 concludes. 5

2. A descrpton of the gasolne retal market and the data set The gasolne retal market 7 There are around 4,300 gasolne statons n the Netherlands wth the fve largest ol companes (BP, Esso, Shell, Total, and Texaco) havng a total market share of around 70% (measured as the total number of statons usng the brand of these fve companes dvded by the total number of statons). Roughly speakng there are three types of ownershp models: some statons (ncludng almost all the larger statons along the hghways) are company-owned and company-operated (coco), other statons are company-owned and dealer-operated (codo), and the remanng statons are dealer-owned and dealer-operated (dodo). Coco statons are not free to set ther own gasolne prces: these prces are set at the central company level. The dealers of a codo staton rent the statons from the ol company, partcpate n the company s sales and loyalty programs, but are free to set ther own prces. Fnally, dodo statons operate most ndependently from the larger ol companes, although even these statons have to buy the gasolne they sell from the ol company. Approxmately 60% of the statons are dealerowned. Rough estmates ndcate that around 80% of the statons are dealer-operated. There s a close relaton between the nput prces for gasolne and the prces on the nternatonal market. Although the large ol companes cover the complete producton chan from extractng ol to sellng gasolne, the Dutch gasolne sales dvsons manly buy ther gasolne at the Amsterdam- Rotterdam-Antwerp (ARA) spot market whch supples large parts of western Europe. A prce for ths spot market s publshed once a day. Shell (the largest ol company) clams that even f the Dutch sales dvson buys gasolne from a producton dvson, t uses ths spot market prce as nternal prce. 8 The larger ol companes have suggested prces that they determne on a daly bass. Shell has publshed detaled descrptons on how they calculate ther suggested prce (see, e.g., Shell (2001) and the Shell webste). They clam that every mornng they take the spot market prce of the prevous day (whch s the most recent prce avalable) and add dfferent taxes and margns (for transport, sales costs, etc.) to come up wth a prce they thnk gasolne statons should charge for ther gasolne. If ths 7 Unless mentoned otherwse, the source of the data n ths secton s BOVAG (2006). 8 www.shell.nl 6

prce s dfferent from the current prce, a prcng commttee meets to determne whether they change the suggested prce and by how much. If the commttee decdes to change the prce, the ol company communcates the new prce (whch s vald from the next day onward) va fax and e-mal to all dealers n the evenng. Dealers can then update ther prces the next mornng. If they ndeed follow ths decson process, the delay between changes n the spot market prce and prces at statons s exactly two days. The data set Retal gasolne prces are publshed daly on the webste of Athlon Car Lease. 9 Ths company leases cars to other frms ncludng a so-called fuel card. If the drver flls up hs car wth gasolne, he shows the card to the staton and the retaler electroncally sends the bll wth prce and quantty nformaton to the lease company at the same tme. As a result, Athlon Car Lease obtans gasolne prce notatons from 120,000 drvers, who fll up on average twce a week, from all over the Netherlands. Athlon Car Lease puts the data on gasolne prces on ts webste and I have downloaded the data daly over the perod May 30 2006 July 20 2008. As ndcated n the prevous subsecton, there are approxmately 4,300 gasolne statons n the Netherlands, of whch the data set ncludes about 3,600. Statons that the data set does not nclude seem to be mostly smaller and non-actve statons randomly dstrbuted over the country. The amount of statons I report throughout the paper s not exactly equal to the number of physcal statons. For some gasolne statons n the data set, the name changes durng the sample perod and I do not merge the seres of these statons. Data are avalable for seven dfferent knds of gasolne: Euro95, Desel, Super, Super Plus, Specal Euro95, Specal Desel, and untaxed Desel. I focus on Euro95. The whole data set contans approxmately 6,000 unque staton-gasolne type-prce quotatons per day. 10 For each staton-gasolne type combnaton I have a maxmum of one prce quotaton per day. Snce less busy statons have a lower probablty of beng vsted by a drver of a car leased from Athlon Car Lease, the data set contans 9 www.athloncarlease.nl 10 Only a couple of observatons n the data set are suspcous. There seem to be a few cases where a certan type of gasolne s reported as another knd of gasolne. I deleted these quotatons. 7

more quotatons of buser statons. Ths does not have an mpact on the analyss, however, as there s no ndcaton that the prcng decsons of larger gasolne statons dffers sgnfcantly from that of smaller ones (after correcton for ownershp structure). Fnally, drvers do not have to pay for the gasolne (because the frm that employs the drver does). So these users do not avod more expensve statons. Casual observaton shows that they also do not avod cheaper statons. I matched ndvdual statons n the data set to lsts of staton-specfc characterstcs, namely owner and brand of a staton and whether a staton s located along a hghway. 11 I do not have data on the operator of a staton, but I do know the ownershp structure. As a consequence, I am able to flter out the statons where an ol company decdes on the prce. I also matched each staton to data on the area n whch the staton s located (ncome per capta, populaton, number of cars, number of people older than 60, number of mmgrants (all per 4 dgt zp code), and unemployment (per muncpalty)). 12 Durng the sample perod I downloaded the suggested prces from the webste of Unted Consumers. Ths webste contans daly suggested prces of the fve largest ol companes for eleven dfferent types of gasolne (some types are brand specfc). 13 The spot market notaton I use s the daly Platt s Barges FOB Rotterdam Hgh (seres for Euro95: Premum Gasolne 10 PPM). Shell uses the same notaton for calculatng the suggested prce (Shell (2001)). The webstes of the European Central Bank and the Dutch Mnstry of Fnance provded respectvely the dollar-euro exchange rate and data on taxes. I converted all gasolne prces to prces per lter (excludng taxes) n euros. 11 I obtaned lsts wth the ownershp structure and brand of a staton from Catalst (a company collectng data on gasolne statons) and a lst wth hghway statons from the Dutch Mnstry of Fnance. It may be that statons change ther brand or ownershp structure durng the sample perod. As I do not have nformaton on ths, I assume that statons do not change ther brand and ownershp structure. 12 The source of these data s the webste of Statstcs Netherlands. 13 The suggested prce of Shell ncreases 125 tmes and decreases 122 tmes durng the sample perod. For other brands these numbers are smlar. 8

3. Do ol companes respond asymmetrcally? In ths secton I study f ol companes adust ther suggested prces asymmetrcally to changes n the gasolne spot market prce. Augmented Dckey-Fuller unt root tests ndcate that the spot market prce and suggested prces of the fve largest ol companes are ntegrated of order 1. Therefore I estmate asymmetrc error correcton models to take nto account possble contegraton between the suggested prce and the spot market prce. 14 The long-run relatonshp between the spot market prce and the suggested prce for each ol company s: Sug * * * * *, t Spott 2 c Tmet Mxt, t (1) where Sug, s the suggested prce of ol company for one lter of gasolne at day t, Spott2 s the t gasolne spot market prce at day t-2, and ol company and gasolne staton. n the margn, * c s a constant that reflects the average gross margn for the Tme t s a tme trend that captures a possble nflatonary ncrease Mx t s a dummy varable whch s 1 after January 1 st 2007 (law requres ol companes * to add bofuels from that date onward), and,t s an error term. All prces are n euro per lter and exclude excse duty and VAT. I use the two-day lagged spot market prce for gasolne, snce ths s the relevant nput prce for the suggested prce (see Secton 2). 15 I choose a lnear relatonshp nstead of a log specfcaton because the data show that the absolute dfference between the suggested prce and spot market prce s stable and ndependent of the level of the spot market prce (see also Borensten, Cameron, and Glbert (1997)). Taxes do not dffer substantally over the estmaton perod and I do not consder ther mpact. I do not make a dstncton between changes n the exchange rate and changes n the spot market prce n dollars. If the resduals of Equaton 1 are statonary, a contegratng relaton exsts. In that case I can superconsstently estmate the coeffcents n Equaton 1 and defne a short-run relaton between the varables. Frst, I specfy for each ol company a symmetrc relaton between the suggested prce and the spot market prce: 14 These are the standard models n ths lterature, see, e.g., Bachmeer and Grffn (2003) and Frey and Manera (2007). 15 The spot market prce has the hghest correlaton wth the suggested prce f I use a two-day lag. 9

Sug k l *, t,1spott 1,2 Spott2, Sug, t, t1, t 0 1 (2) where, t s an error term. 16 In ths equaton I nclude the one-day lagged change n the spot market prce as well. The two-day lagged spot market prce s the relevant prce for the suggested prce (see Secton 2 and Equaton 1). Ths prce s the most recent quotaton avalable at the moment the prcng decson s made. However, at the moment that an ol company decdes on ts suggested prce for day t (the mornng/afternoon of t-1), t can take nto account the movements of the spot market prce t perceves on t-1 (or t can look at prces of related products (e.g., crude ol) for whch real-tme prce data are avalable). I use the change n the one-day lagged spot market prce as a proxy for the new nformaton that became avalable snce the most recent daly spot market prce was publshed. Second, I specfy an asymmetrc relaton between the suggested prce of an ol company and the spot market prce: 17 Sug v w, t,1spott1,1spott1,2 Spott2,2 0 0 x 1 y * *, Sug, t, Sug, t, t 1, t 1, t 1 Spot t2 (3) where for each varable z : z max{ z,0} and z mn{ z,0}. And where * max{ *,0} * 1 and mn{ *,0 1 }. A plus (mnus) as superscrpt to a coeffcent, t1, t, t1, t ndcates that the coeffcent belongs to an ncreasng (decreasng) varable. Besdes prce asymmetry va the mpact of current and lagged changes n the spot market prce and lagged changes n the suggested prce, t s also possble that there s asymmetry n the speed of adustment to the equlbrum suggested prce. If, then the suggested prce returns more slowly to ts equlbrum value f the suggested prce exceeds ts equlbrum value. Inspecton of the data shows that the fve largest ol companes never change suggested prces on Sundays and rarely on Mondays. Ths s possbly the case because the suggested prces for these days 16 Equaton 1 and 2 can be rewrtten nto a standard ARDL(k+1,l+1) model. 17 A long-run asymmetrc relaton between the spot market prce and suggested prce cannot exst. If n the long run the pass-through of ncreases n the spot market prce s stronger than the pass-through of decreases, ths would mply that margns would ncrease nfntely over tme. 10

should be decded on Saturdays and Sundays and these are not workng days. Snce I would lke to explan suggested prces by the spot market prce and not by workng schedules, I exclude from my sample the days for whch the suggested prce should be decded durng weekends and offcal natonal holdays (547 out of 783 days are left). So dfferenced varables reflect dfferences between days on whch ol companes decde on the suggested prce. I estmate a separate specfcaton for each ol company. I use the Engle-Granger two-step estmaton procedure and estmate all equatons by OLS. To nterpret the estmaton results and test for asymmetrc prce responses, I calculate cumulatve adustment functons (see Borensten, Cameron, and Glbert (1997)). These functons measure the cumulatve change n the suggested prces after a 1 cent ncrease and a 1 cent decrease n the spot market prce. I compute the cumulatve change n the suggested prces up to 25 days after the shocks. The dfference between the cumulatve change n the suggested prce after a 1 cent ncrease and a 1 cent decrease n the spot market prce reflects the degree of asymmetry at a certan pont n tme. Frst I estmate Equaton 1 for each ol company. Then I take the resduals and estmate Equaton 3 for each ol company. I choose the lag lengths (v,w, x, and y) by usng the Schwarz nformaton crteron and ths procedure results n lag lengths of zero for all varables and brands. 18 I use Whte heteroskedastcty-consstent standard errors. The resdual-based test for contegraton reects the null of no contegraton for all fve ol companes. The estmated coeffcent for the long-run mpact of the spot market prce s close to 1 for all fve brands. 19 Thus, n the long run there s a full pass-through of changes n the spot market prce nto the suggested prce. 20 Fgure 1 shows the cumulatve adustment functons of the suggested prces after a 1 cent postve and a 1 cent negatve change n the spot market prce. The fgure also reports the dfference between the cumulatve adustments and ts 95% confdence nterval. 21 I frst dscuss the cumulatve adustment of 18 Only for Brand B the Schwarz nformaton crteron prefers w=1, but dfferences are mnor and for comparson wth the other brands I report results for w=0. 19 The values of the estmated coeffcents (and ther standard errors) are 1.006 (0.006), 1.009 (0.005), 1.003 (0.005), 0.998 (0.006), and 0.983 (0.005). 20 Throughout the paper I do not report other parameter estmates to save space (I only report the maor varable n the long-run relaton), but nstead I present the estmaton results va cumulatve adustment functons. Parameter estmates are (lke all other omtted results) avalable upon request. 21 I use the delta method to derve the standard errors. 11

Brand A (upper left corner of the fgure). It shows that the dfference s postve n the frst few days after the change n the spot market prce, but the dfference s never sgnfcantly dfferent from 0 (0 s always n the 95% percent confdence nterval). For example, two days after an ncrease, the passthrough n the suggested prce s 0.581 cent. However, two days after a decrease, the pass-through s only 0.485 cent. No dfference remans after about four days. After approxmately seven days the ol company has fully absorbed the shock n ts suggested prce. The cumulatve adustment functons for the other ol companes are smlar. For all fve ol companes there s some asymmetry, but ths s never statstcally sgnfcant. 4. Do gasolne statons respond asymmetrcally? In ths secton I take up the queston whether gasolne statons adust ther retal prces asymmetrcally to changes n the spot market prce. I defne P, t as the retal prce of staton for one lter of gasolne at day t (n euro per lter, excludng excse duty and VAT). Snce I already modeled the relaton between the spot market prce and suggested prce n Secton 3, I obtan the approprate equatons for the relaton between the spot market prce and retal prce by takng Equaton 1, 2, and 3 and smply replace Sug, t by P, t n these equatons (I refer to these equatons as respectvely 1, 2, and 3 ). 22 In Equaton 1, 2, and 3, the subscrpt refers to gasolne staton. In contrast to ol companes, gasolne statons are open on weekends and durng holdays and thus have the opportunty to change ther prce on these days. For that reason I nclude all days n the sample. I estmate the relatonshp when all gasolne statons are pooled (to measure asymmetry at the market level) and also for each ndvdual gasolne staton (to measure asymmetry at the frm level). To nterpret the estmaton results I calculate cumulatve adustment functons to measure the cumulatve change n the retal prces up to 25 days after a 1 cent ncrease and a 1 cent decrease n the spot market prce. 22 The one-day lagged spot market prce s not a proxy for new nformaton n ths specfcaton snce gasolne statons know ths prce at the moment that they decde on ther retal prce. The change n the current spot market prce has no explanatory power for the change n the retal prce. I take the two-day lagged spot market prce as the long-run equlbrum prce. The retal prce has the hghest correlaton wth the spot market prce f I use a two-day lag. Moreover, the two-day lagged spot market prce s the bass for the suggested prce (see Secton 2). Faber and Janssen (2008) show that many retalers use the suggested prce for settng ther prce. 12

Fgure 1 Cumulatve adustments of the suggested prces (after spot market prce change) Brand A Brand B 1,2 1,2 1 1 Cumulatve adustment of suggested prce Brand A 0,8 0,6 0,4 0,2 Cumulatve adustment of suggested prce Brand B 0,8 0,6 0,4 0,2 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0,2 Day 0,2 Day Brand C Brand D 1,2 1,2 1 1 Cumulatve adustment of suggested prce Brand C 0,8 0,6 0,4 0,2 Cumulatve adustment of suggested prce Brand D 0,8 0,6 0,4 0,2 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0,2 Day 0,2 Day Brand E 1,2 1 Cumulatve adustment of suggested prce Brand E 0,8 0,6 0,4 0,2 plus 1 mnus 1 dfference 95% confdence 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0,2 Day 13

All statons pooled Frst, I estmate the pooled equaton. Ths mples that for each coeffcent and the error term n Equatons 1, 2, and 3. I use Drscoll-Kraay standard errors that are robust to heteroskedastcty, seral correlaton, and cross-sectonal correlaton (see Drscoll and Kraay (1998) and Hoechle (2007)). Augmented Dckey-Fuller Fsher panel unt root tests (Maddala and Wu (1999), Cho (2001)) ndcate that retal prces are, lke the spot market prce, ntegrated of order one. The panel contegraton test of Kao (1999) reveals homogeneous contegraton between retal prces and the spot market prce. The estmated coeffcent for the long-run mpact of the spot market prce s 0.993 (standard error equals 0.007). To further nterpret the results, I look at the cumulatve adustment functon. Fgure 2 shows the cumulatve adustment functon for v=w=x=y=1 (for other specfcatons the results are smlar). 23 There s sgnfcant asymmetry at the market level. However, the extent of asymmetry s moderate and the asymmetry lasts for a short tme. The dfference n the cumulatve change n the retal prce after a 1 cent ncrease and a 1 cent decrease n the spot market prce s sgnfcantly dfferent from 0 on the frst day after the shock (the absolute dfference s 0.120 cent). On day 2 there s a stll a dfference (0.062 cent), but ths s not sgnfcantly dfferent from 0. After these two days the dfference s neglgble. After 16 days, retal prces have adsorbed more than 97.5% of both the postve and negatve shock. 24 In the next paragraphs I study asymmetry at the frm level. 23 The specfcaton that I present uses n total 3,658 statons and 1,052,741 observatons. 24 The sum of the dfference between the postve and negatve cumulatve adustment equals 0.199 cent after 25 days. So f a consumer buys 1 lter per day for 25 consecutve days after the shock, the consumer pad n total 0.199 cent more after a 1 cent ncrease n the spot market prce than what the consumer would have saved after a 1 cent decrease. Per day gasolne statons sell n total 14,3 mllon lters of Euro95 (data for 2004, BOVAG (2006)). Ths mples that all consumers together pay 28,423 euros more after a 1 cent ncrease n the spot market prce than they save after an equal decrease. 14

Fgure 2 Cumulatve adustment of retal prces (after spot market prce change, pooled estmaton) 1,2 1 Cumulatve adustment of retal prces 0,8 0,6 0,4 0,2 plus 1 mnus 1 dfference 95% confdence 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0,2 Day Indvdual statons I estmate Equaton 1 and 3 for 2,365 gasolne statons. 25 I choose a maxmum value for v, w, x, and y of 3 and select the lag length va the Schwarz nformaton crteron. 26 The mean of the estmated longrun mpact of the spot market prce on the retal prce s 0.988 (standard devaton equals 0.045). Based on these and the other estmated coeffcents, I calculate a cumulatve adustment functon for each staton. 25 The sample contans 4,004 statons. For 2,549 statons there s enough data to estmate both Equaton 1 and 3. I exclude 7 statons because the resdual-based test for contegraton could not reect the null of no contegraton n Equaton 1 (all prce seres of the estmated statons are ntegrated of order 1). Furthermore, I exclude 49 statons because the estmated γ + or γ - n Equaton 3 s not between -2 and 0 (ndcatng that for these statons the retal prce does not return to ts equlbrum value) and 128 statons for whch 20 or fewer observatons that dffer from 0 are avalable for estmatng one of the parameters n Equaton 3 (more restrctve condtons do not change results much). There are 2,365 statons left. Of these 2,365 statons, I correct the standard errors for 1,148 statons for heteroskedastcty and for 910 statons for heteroskedastcty and seral correlaton. 26 If I use a hgher maxmum lag length I can estmate the equaton for fewer statons and n practce only a lmted number of statons use more than 1 lag. 15

Frst, I calculate the percentage of gasolne statons that adust prces asymmetrcally. For each gasolne staton I calculate the number of days for whch the dfference between the cumulatve prce change after a postve shock and after a negatve shock s postve and sgnfcantly dfferent from 0 at the 5% sgnfcance level. When ths number of days s one or more, I defne a staton as respondng asymmetrcally. Most gasolne statons do not prce asymmetrcally. However, a substantal part of the gasolne statons do. Table 1 shows that 38% of the gasolne statons respond asymmetrcally. 27 The table also shows the total length of the asymmetrc part of the transmsson process. Ths total length dffers between statons, although for most statons that adust prces asymmetrcally the asymmetry exsts for only 1 or 2 days. There s hardly any staton for whch a postve shock leads to a sgnfcantly larger cumulatve prce adustment than a negatve shock for 5 days or more. Second, I study on whch days the transmsson processes are asymmetrc. Does asymmetry arse drectly after the shock or only after a couple of days? For each day I calculate the number of gasolne statons for whch the dfference between the cumulatve prce change after a postve shock and a negatve shock s postve and sgnfcantly dfferent from 0. Fgure 3 shows the results. Most asymmetry takes place on the frst day after the shock. On the frst day, for 637 out of 2,365 gasolne statons (27%) the dfference n the cumulatve prce change after a postve and negatve shock s postve and sgnfcantly dfferent from 0. On day 2 the dfference s postve and sgnfcant for 169 statons. After day 2, ths number decreases further and becomes small. 27 Although the ntutve nterpretaton of ths percentage s straghtforward, the exact nterpretaton s not obvous because t s not clear what ths percentage would be f there were no asymmetrc prcng. If I test once for each gasolne staton the null hypothess of symmetry at a 5% sgnfcance level, then the test falsely reects symmetry for 5% of the statons. As a consequence, I expect that f none of the gasolne statons adust prces asymmetrcally, the tests ndcate that 5% of the statons do prce asymmetrcally. In my case ths analyss s more complcated because I defne a staton as prcng asymmetrcally f for at least 1 out of 25 days the dfference s postve and dfferent from 0 at the 5% sgnfcance level. I do not correct the reported percentages for ths effect. 16

Table 1 Percentage of statons that adust prces asymmetrcally and the total length of the asymmetrc part of the transmsson process plus>mnus mnus>plus number of statons % of statons number of statons % of statons Total 2,365 2,365 0 days 1,468 62% 2,200 93% 1 day or more 897 38% 165 7% 1 day 686 29% 72 3% 2 days 135 6% 24 1% 3 days 20 1% 16 1% 4 days 19 1% 15 1% 5 days 9 0% 9 0% 6 days or more 28 2% 29 1% Thrd, I calculate the extent of the asymmetry. For each day I compute for the 38% of the gasolne statons that respond asymmetrcally the average dfference between the cumulatve prce change after the postve and negatve 1 cent shock. Fgure 4 shows the result. The asymmetry s on average 0.193 cent on the frst day, but declnes over tme. One day after a 1 cent shock, the prce of asymmetrcally prcng statons ncreases on average by 0.346 cent after a postve shock and decreases on average by 0.153 cent after a negatve shock. Ths means that a consumer pays at statons that adust prces asymmetrcally on average 0.193 cent more f t s a postve shock than what the consumer saves f t s a negatve shock. On day 3 the dfference s close to 0. To place these numbers n perspectve, Fgure 4 also contans the average dfference between the cumulatve prce change after a postve and negatve shock for all 2,365 estmated gasolne statons (so ncludng the statons that adust prces asymmetrcally). It shows the mportance of measurng the extent of asymmetry at the frm level. The average extent of asymmetry n the frst days dffers substantally between all statons and the statons that adust prces asymmetrcally. On day 1 the mean of the dfference over all statons s postve and equals 0.125 cent (ths s close to the value from the pooled estmaton). Thus, on day 1 the estmated extent of the asymmetry s on average 0.068 cent (54%) larger when I only take nto account statons that adust prces asymmetrcally. 17

Fgure 3 The days on whch the transmsson processes are asymmetrc (the number of statons that respond asymmetrcally per day) 700 600 Number of gasolne statons 500 400 300 200 100 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Day plus>mnus statons mnus>plus statons Fgure 4 Average extent of asymmetry (dfference between the cumulatve adustments) 0,2 0,15 Average extent of asymmetry 0,1 0,05 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0,05 0,1 Day all statons plus>mnus statons mnus>plus statons 18

Fourth, to measure the length of the full transmsson process, I calculate the number of days that t * takes before the cumulatve change n the retal prce almost equals the long-run pass-through (I calculate the number of days that the prce s outsde the nterval {0.975, 1.025 }). Fgure 5a shows for all gasolne statons the length of the transmsson process after a postve shock. For asymmetrcally prcng statons t takes on average 9.8 days and for other statons 8.8 days. I also calculate the length of the transmsson process after a negatve shock. Fgure 5b depcts for each gasolne staton the dfference between the length of the transmsson process after a postve and negatve shock. For a maorty of statons ths dfference s around zero (mean dfference s 0.3 days). Ths ndcates that the full pass-through of a postve and negatve shock takes the same amount of tme. However, for asymmetrcally prcng statons the full transmsson process s on average shorter after a negatve shock than after a postve shock (1.1 days). Ths dfference arses because asymmetrcally prcng statons take more tme n the case of a postve shock and a bt less tme n the case of a negatve shock compared to other statons. 28 * * Up untl now, I looked nto the possblty that the pass-through of ncreases n the spot market prce s faster than the pass-through of decreases. However, another possblty s that retal prces respond faster to decreases n the spot market prce. The data show that gasolne statons do not often practce ths type of prcng. I frst calculate the percentage of gasolne statons that change ther prce faster after decreases than after ncreases. For each gasolne staton, I compute the number of days on whch the dfference between the cumulatve prce change after a postve shock and after a negatve shock s negatve and sgnfcantly dfferent from 0 at the 5% sgnfcance level. The fourth column of Table 1 shows that for 7% of the statons ths occurs on at least one day. 29 For most of these statons ths effect takes ust one day n total. Fgure 3 shows for how many gasolne statons the dfference s sgnfcantly negatve on each day. Ths number s the hghest on day 5 (67 statons) and declnes afterward. Fgure 4 shows the extent of the effect for the 7% of gasolne statons. The average 28 The ndvdual estmatons show on average a shorter estmated length of the transmsson process than the pooled estmaton. Ths possbly ndcates a summaton bas. The maxmum length of the transmsson process after a postve shock and after a negatve shock s accordng to the pooled estmaton 15 days. Accordng to the ndvdual estmatons, ths number s on average 10.1 days. 29 There are 104 statons for whch the dfference between the cumulatve prce change after a postve and a negatve shock s both sgnfcantly postve and sgnfcantly negatve at least once. 19

dfference s postve on day 1, negatve on day 2 (0.079 cent) and subsequently moves n the drecton of 0. As a robustness check, I also estmate Equaton 3 wth and dfferent maxmum values for v, w, x, and y (ths enlarges the number of observatons per staton). Table 2 reports the results. The percentage of gasolne statons that adust ther prces asymmetrcally s between 30% and 42%, dependng on the exact specfcaton. The percentage of gasolne statons that respond faster to decreases than to ncreases n the spot market prce vares between 1% and 8%. In Appendx A I study whether gasolne statons respond asymmetrcally to the suggested prce that s announced by ther ol company. Agan the results ndcate that there exsts heterogenety of statons. I fnd that 22% of the gasolne statons adust ther retal prces asymmetrcally to changes n the suggested prce. The pass-through of shocks n the suggested prce s faster than of shocks n the spot market prce, although the extent of the asymmetry s smlar. One day after a 1 cent ncrease n the suggested prce, the prce of statons that adust prces asymmetrcally rses on average by 0.903 cent. One day after a 1 cent decrease n the suggested prce, the prce at these statons declnes on average by 0.698 cent. As a result, for statons that adust prces asymmetrcally there s an average asymmetry of 0.205 cent on day 1. The dfference wth the estmated asymmetry at the market level s large, ndcatng the mportance of the estmatons per staton. On day 1 the estmated asymmetry at the market level s only 0.043 cent. For asymmetrcally prcng statons the transmsson process after a postve shock takes on average 6.1 days. The asymmetrc part of ths transmsson process for most statons s ust one day and t takes place on the frst days after the shock. 20

Fgure 5a Length of the transmsson process after a postve shock 450 400 Number of gasolne statons 350 300 250 200 150 100 50 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 or more Number of days Fgure 5b Dfference n length of the transmsson process after a postve and negatve shock Number of gasolne statons 500 450 400 350 300 250 200 150 100 50 0 11 or less 10 9 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 10 11 or more (Number of days after postve shock) (Number of days after negatve shock) 21

Table 2 Alternatve specfcatons for Equaton 3 plus>mnus % of statons mnus>plus max v=w=x=y=3 38% 7% max v=w=x=y=1 38% 7% max v=w=x=y=0 36% 5% max v=w=3, x=y=0 42% 8% max v=w=3, x=y=0; γ + = γ 38% 5% max v=w=x=y=0; γ + = γ 30% 1% Note: For all specfcatons I use the same 2,350 statons. 5. What knd of gasolne statons respond asymmetrcally? The prevous secton shows that there exsts heterogenety n the prcng behavor of gasolne statons: some statons adust prces asymmetrcally, whle others do not. Ths shows that any explanaton for prce asymmetry has to be found at the frm level. Pure market level explanatons of asymmetrc prce adustments (for example, the nature of the producton and dstrbuton process or the volatlty of the spot market prce) would mply that all gasolne statons adust prces asymmetrcally. Ths leads to the followng questons: s there a systematc pattern n the type of statons that do prce asymmetrcally? Are there specfc features that explan why statons prce asymmetrcally? Or s asymmetrc prcng a more random phenomenon? Theoretcal studes often explan asymmetrc prce adustments by tact colluson between retalers or a low search ntensty of consumers. However, there exsts no overarchng theory that I can use to emprcally test one theory aganst the other. For that reason, I do not try to answer why statons adust prces asymmetrcally, but I look at whch statons adust prces asymmetrcally. I look for staton-specfc characterstcs that are broad proxes for tact colluson and/or a low search ntensty. Ths fshng expedton may gve nput for further theoretcal dscusson on asymmetrc prcng (Peltzman (2000) has a smlar strategy). I fnd that characterstcs of asymmetrcally prcng statons and other statons do not dffer much. Therefore, asymmetrc prcng seems to be a random phenomenon n the populaton of gasolne statons. I frst 22

brefly dscuss the two man theoretcal explanatons, then the methodology that I use, and fnally I present the results. Theory Tact colluson Tact colluson can explan asymmetrc prcng as follows (see also the nterpretaton of Verlnda (2008) of Rotemberg and Saloner (1986), Haltwanger and Harngton (1991), and Borensten and Shepard (1996)). If wholesale costs rse, the dfference between the monopoly prce and wholesale costs declnes. Ths makes short-term collusve profts lower, therefore colluson s less attractve and markups are lower. On the other hand, f wholesale costs go down, the dfference between the monopoly prce and wholesale costs goes up, short-term collusve profts are hgher, colluson s more attractve and as a result markups are hgher. So when wholesale costs go up, frms compete. When wholesale costs go down, frms tactly collude and keep prces hgh. In practce, the change n wholesale costs s about the same for all gasolne statons. However, because the market characterstcs that make tact colluson easer to sustan may dffer between statons and areas, t s possble that tact colluson, and thereby asymmetrc prcng, s only present n some areas. 30 Ths form of tact colluson s very subtle as a short-term strategy for gasolne retalng, snce frms would swtch frequently between colluson and competton because wholesale costs change on a daly bass. Balke, Brown, and Yücel (1998) offer an alternatve explanaton n whch frms do not frequently swtch between tact colluson and competton. Suppose that statons are tactly colludng and that statons are uncertan about the wholesale costs of other statons. Moreover, ths tact colluson s so proftable that statons do not want to rsk that the cooperaton comes to an end. If the wholesale costs for a staton rse, the staton mmedately ncreases ts prce to sgnal that t stll 30 Borensten, Cameron, and Glbert (1997) have a dfferent, but smlar, explanaton. Suppose statons are not colludng and ask the equlbrum prce. If wholesale costs rse, the equlbrum prce rses and statons ncrease ther retal prce as well. If wholesale costs decrease, all statons may earn hgher profts f none of the statons mmedately lower ther prce. In that case statons coordnate ther prces wth the prevous retal prce as focal pont. Over tme, prces return to the new lower equlbrum prce because of random changes n demand and the rsk that ths occurs due to undercuttng compettors. 23

partcpates n the tact agreement and that t does not try to cheat by lowerng ts margn. On the other hand, f the wholesale costs fall, the staton s reluctant to lower ts prce because t mght gve the mpresson that the staton s breakng the tact agreement. As a result, statons respond asymmetrcally to changes n the wholesale costs. The followng hypothess tests f tact colluson explans asymmetry. If a staton can cooperate more easly wth other statons and/or tact colluson s more proftable, then there s a hgher probablty that t adusts prces asymmetrcally. For example, statons wth the same brand can cooperate more easly and therefore I expect that an asymmetrcally prcng staton s more often surrounded by statons that have the same brand. Low search ntensty A low search ntensty can also cause asymmetrc prce adustments (see Deltas (2008) and also Johnson (2002), Lews (2005), Cabral and Fshman (2008), Yang and Ye (2008), and Tappata (2009)). Suppose consumers know the prce for whch they bought gasolne the prevous tme, but they do not know wholesale costs. If wholesale costs rse and a consumer comes to a gasolne staton and sees a hgh retal prce, the consumer does not know that the prce has gone up because wholesale costs have gone up. So the consumer perceves ths as a relatvely hgh prce and starts searchng. As a result, there s strong competton and a low margn for the retaler. On the other hand, f wholesale costs declne, the consumer does not know ths. A relatvely hgh retal prce stll seems reasonable. The consumer does not search and ths gves the retaler an opportunty to get a relatvely hgh margn. In other words, the pass-through of wholesale cost changes s hgh when there s ferce competton because of hgh search ntensty and low when there s less competton because of a low search ntensty. Therefore asymmetry ncreases when search ntensty decreases. 31 The degree to whch consumers search depends on the costs and benefts that are specfc to areas, statons, and ndvduals. For that reason t s possble that asymmetry s only present n some regons or at some statons. 31 Janssen, Pchler, and Wedenholzer (2009) consder a sequental search model wth ncompletely nformed consumers and study a specfc gasolne retal market. Among other thngs, they fnd that pror belefs of consumers about costs are mportant for explanng prce dstrbutons. 24