Speed of Adjustment and Market Structure : A Study of the Gasoline Market in Germany

1991 The contents of this paper are the author's sole responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies or any of its Members. This publication is sold subject to the condition that it shall not, by way of trade or otherwise, be lent, resold, hired out, or otherwise circulated without the publisher's prior consent in any form of binding or cover other than that in which it is published and without a similar condition including this condition being imposed on the subsequent purchaser. The purpose of this paper is to study the relationship between changes in costs and prices in the gasoline market in the Federal Republic of Germany (FRG) for the period 1980-90. We shall use an econometric model, and distinguish two stages in the transmission of cost changes to prices. The first is the adjustment of gasoline prices ex-refinery to changes in the price of crude oil, and the second is the adjustment of gasoline price (net of taxes) at the pump to ex-refinery prices. A vast economic literature has accepted the view that a relationship exists between market forms and the speed of transmission of cost changes to final price. The study of price adjustments to cost changes involves the analysis of two interrelated but different phenomena. The first is the speed of adjustment, defined here as the mean of the length of the time periods required for the transmission of the full effect of an exogenous shock from the independent to the dependent variable of the econometric model used in the analysis. The second relates to possible asymmetries in the response of prices to increases and decreases in costs. Both phenomena are closely related to the structure of the market. The common assumption in economic writing, is that the first-the length of the adjustment period-is negatively correlated to the degree of competition (i.e. the speed of adjustment is positively correlated to the competitiveness of the market), and that the second-the asymmetry of price responses-is an indication of the prevailing market structure. The main findings of this paper are as follows: a) at the refinery level there is only weak evidence of asymmetrical reaction; the average lag in case of crude price increases or decreases is about three months.