Testing for Asymmetric Pricing in the French Retail Industrial Fuel Oil Market

Fidelia N Onuigbo ,Jonathan E Ogbuabor

doi:10.7176/jetp/9-2-03

Abstract

This study investigated the French industrial fuel oil market for evidence of asymmetric price adjustment and rent-seeking following changes in crude oil prices. The study adopted the nonlinear autoregressive distributed lag (NARDL) framework recently advanced for modeling cointegrating relationships. The study also used monthly time series data for the period January 2005 to December 2015. The results indicate that French industrial fuel oil market is fraught with sluggish speed of adjustment, which is typical of markets witnessing uncompetitive pricing and other irregular behaviours by retail firms. The results further indicate that French industrial fuel oil market is bedeviled by the problem of short-run asymmetric price transmission from crude oil market, which is consistent with the rockets and feathers effect. However, the results did not show any evidence of rent-seeking since the observed short-run asymmetry is not obscured at pump. The study concludes that in view of the prevailing problem of rockets and feathers effect, policies that encourage continuous monitoring of the market in order to preserve competition and the overall social welfare should be embraced by policymakers and regulators in this market. Keywords : Rockets and Feathers effect; Rent-seeking; Asymmetric Price Adjustment; Nonlinear ARDL model; France JEL Codes: Q43; D40; C22; N94. DOI : 10.7176/JETP/9-2-03

Highlights

France is a European country with negligible domestic oil production activity
The results indicate that asymmetric adjustments in retail gasoline and diesel prices are common, and that the adjustments are a type of politico-economic asymmetry
The results show that asymmetric price transmission (APT) exists for unleaded gasoline (ULG) but not for high speed diesel (HSD)

Summary

Introduction

France is a European country with negligible domestic oil production activity. As of 2012, its oil import dependency ratio stood at 98.5%. The objective of this study is to examine the French retail industrial fuel oil market for evidences of asymmetric price adjustment and rent–seeking following changes in crude oil costs. This study investigates the French industrial fuel oil market for evidence of sluggish speed of adjustment, rockets and feathers effect, and the possibility of rent-seeking behavior by retail firms. This study adopted the econometric framework applied by GS13 in modeling the asymmetric price transmission in the UK retail energy sector, which was initially advanced by Shin, Yu and Greenwood-Nimmo (2013) for modeling asymmetric cointegration and dynamic multipliers in a non-linear autoregressive distributed lag (NARDL) framework Under this framework, short-run and long-run non-linearities were introduced through positive and negative partial sum decompositions of the explanatory variables. The result of cointegration tests based on the bounds testing approach of Pesaran, Smith and Shin 2001 ( PSS) and the t-BDM statistic of Banerjee et al (1998) are reported in this study

Empirical results and discussion

Conclusion and policy implications