Is market power the cause of asymmetric pricing in China's refined oil market?

Abstract

The asymmetric response of Chinese refined oil prices to crude oil prices is essentially an issue of economic efficiency, and the collusion of the oil oligarchs is not conducive to the market-oriented reform and economic sustainability. The purpose of this paper is to test whether the prices of refined oil products in China does indeed have the asymmetric fluctuations of “rising more and falling less”, and to analyze whether there are unreasonable pricing behaviors colluding among oil companies. We first examine the relationship between refined oil prices and the crude oil price by applying the NARDL using the monthly data from June 2000 to May 2021, and then designs a two-stage regression process based on the EGARCH model to check whether the asymmetric pricing is the result of the market power formed by the oligopolistic collusion. The results show that the asymmetric reaction of gasoline and diesel prices to crude oil prices in China is basically the same. Only the long-run asymmetry has been confirmed while the short-run asymmetry has not passed the test. The long-term equilibrium price amid fluctuations in Chinese refined oil prices is slowly being pulled higher, most likely due to the increased market power of oil companies. Long term asymmetry means that the oligopoly market equilibrium is approaching monopoly. The cause is in the refining segment of refined oil, not in the retail segment because the EGARCH model has only successfully identified the market power in the refining sector. The joint tests indicate that the oil oligarchs may have passed the cost information, which is conducive to raising prices in the long term, to the price regulators, and there is an unreasonable part of China's refined oil prices that undermine market efficiency.