An Empirical Study of Asymmetric Pricing in Retail Gasoline and Diesel Markets in Taiwan, Japan, South Korea, and Singapore

Kuo-Wei Chou,Chin-Yuen Chang,Fei Hu

doi:10.5430/ijfr.v4n3p35

Abstract

This study estimated retail price adjustments in the gasoline and diesel markets of Taiwan, Japan, South Korea, and Singapore using monthly data between 2004M1 and 2012M6. An asymmetric error correction model (ECM) was employed as a framework and the results showed that asymmetric adjustments in retail gasoline and diesel prices are common, and that the adjustments, which quickly and obviously responded to cost reductions, are a type of politico-economic asymmetry. This finding differs from the results of numerous international studies. In other words, although gasoline and diesel markets are evident oligopolies, the government’s intervention behavior appears to control the gasoline and diesel price adjustments of the 4 East Asian countries evaluated in this study (i.e., Taiwan, Japan, South Korea, and Singapore).

Highlights

Gasoline and diesel are the main sources of fuel required for modern life and transportation, and the adjustment of gasoline and diesel prices has become a major public issue
The majority of the price adjustment paths were inconsistent with the “rockets and feathers” trend advocated by several previous studies; rather, they were more consistent with the politico-economic asymmetry proposed by Kirchgassner and Kubler (1992), which was possibly caused by government intervention behavior
When / 1, adjustments to gasoline prices are completed at the t+ith period as oil prices increase by 1% at the tth period, and the ith period is the reaction time for gasoline prices to respond to positive oil price impacts

Summary

Introduction

Gasoline and diesel are the main sources of fuel required for modern life and transportation, and the adjustment of gasoline and diesel prices has become a major public issue. A majority of people believe that increases in oil prices are rapidly reflected in increased gasoline and diesel prices, whereas declines in oil prices are only slowly mirrored in decreasing gasoline and diesel prices. The collusive behavior of retailers in an oligopoly causes gasoline and diesel prices to show an adjustment pattern of rapid increase and slow decrease in response to changing oil prices (Al-Gudhea, Kenc, & Dibooglu, 2007; Borenstein et al, 1997; Chen, Finney, & Lai, 2005; Radchenko, 2005; Verlinda, 2008). The majority of the price adjustment paths were inconsistent with the “rockets and feathers” trend advocated by several previous studies; rather, they were more consistent with the politico-economic asymmetry proposed by Kirchgassner and Kubler (1992), which was possibly caused by government intervention behavior.

The Model

Data Sources and Characteristics

The Estimation of Asymmetric ECM and Price Asymmetry

Findings

Conclusion