Edgeworth Price Cycles, Cost-Based Pricing and Sticky Pricing in Retail Gasoline Markets

Abstract

This paper examines dynamic pricing behavior in retail gasoline markets for 19 Canadian cities over 574 weeks. I find three distinct retail pricing patterns: 1. standard cost-based pricing, 2. sticky pricing, and 3. steep, asymmetric retail price cycles that, while seldom documented empirically, resemble those of Maskin & Tirole [1988]. I use a Markov switching regression to estimate the prevalence of the regimes and the structural characteristics of the price cycles themselves. Retail price cycles prevail in over 40% of the sample. I show they are more prevalent when and where there is a greater penetration of small, independent firms. The cycle is accelerated and amplified in markets with very many small firms. In markets with few small firms, sticky pricing is dominant. Each of these findings is consistent with the theory of Edgeworth Cycles.