The Speed of Gasoline Price Response in Markets With and Without Edgeworth Cycles

Abstract

Retail gasoline prices are known to respond fairly slowly to wholesale price changes. This does not appear to be true for markets with Edgeworth price cycles. Recently, many retail gasoline markets in the midwestern U.S. and other countries have been shown to exhibit price cycles, in which competition generates rapid cyclical retail price movements. We show that cost changes in cycling markets are passed on 2 to 3 times faster than in markets without cycles. We argue that the constant price movement inherent within the Edgeworth cycle eliminates price frictions and allows firms to pass on cost fluctuations more easily.