Station level gasoline demand in an Australian market with regular price cycles*

Abstract

Regular and frequent gasoline price cycles are being observed in many Australian and Canadian markets. What is driving these price cycles has been the subject of academic studies and government investigations. The existing explanations for these price cycles all rely on the presumption that drivers are intensively sensitive to gasoline price differentials at the station level. However, no empirical evidence exists in the literature to support this presumption. This paper provides the first piece of empirical evidence. This paper uses a unique price and quantity data set and novel instruments to estimate the station level gasoline demand in the cycling market of Perth, Australia. The elasticity estimates confirm that drivers in the Perth area are indeed very sensitive to gasoline price differentials.