Search Costs, Lags and Prices at the Pump

Abstract

Evidence is mounting that long lags and asymmetric price responses to changes in wholesale prices are characteristic of many retail markets. Although long lags are often attributed to search costs, little empirical evidence exists to support this claim. The analysis offered in this paper compares price responses in gasoline and diesel markets in 15 U.S. cities. Search costs vary across these two markets, and the evidence indicates a much faster response in the diesel market where search costs are lower. Asymmetric responses, where prices rise faster than they fall, are also evident in the data. While asymmetric responses have been attributed to oligopolistic behavior, the arguments presented in this paper point to search theory as an alternative explanation.