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

  • Author(s): Noel, Michael
  • et al.
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. cost-based pricing, 2. sticky pricing, and 3. steep, asymmetric retail price cycles that, while seldom documented empirically, resemble those of Maskin & Tirole[1988]. Using a Markov switching regression, I estimate the prevalence of patterns and the structural characteristics of the cycles. Retail price cycles prevail in over 40% of the sample. I show they are more prevalent when there is a greater penetration of small firms. The cycle is accelerated and amplified with very many small firms. In markets with few small firms, sticky pricing is dominant. My findings is consistent with the theory of Edgeworth Cycles.

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