European Business Schools Librarian's Group

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 194: Price adjustments by a gasoline retail chain

Marcus Asplund, Rickard Eriksson and Richard Friberg ()
Additional contact information
Marcus Asplund: Dept. of Economic Statistics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, S-113 83 Stockholm, Sweden
Rickard Eriksson: Dept. of Economic Statistics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, S-113 83 Stockholm, Sweden
Richard Friberg: Dept. of Economic Statistics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, S-113 83 Stockholm, Sweden

Abstract: This paper provides a detailed examination of price responses in the Swedish gasoline market to changes in the world market price. We use daily price data from one of the leading retail chains together with input costs (spot market price and exchange rate)for the period January 1980 to December (1996). Over the period the list price was increased (decreased) 130 (120) times, but the periodicity varies substantially and there are very few small price adjustments. This pattern is broadly consistent with a state-dependent pricing rule. Predictions of a simple Ss-model are tested with an ordered probit sample selection model. The results show that price adjustments are more likely to occur when either the input price or the exchange rate has moved significantly since the last price adjustment. However, our results indicate that prices are not adjusted to the long run equilibrium price at once. Therefore we explore an error correction model (ECM), that shows that in the short run prices are gradually moving towards the long run equlibrium in response to cost shocks.

Keywords: price adjustment; sticky prices; price rigidities; exchange rate pass-through; ordered probit sample selection; error correction model; gasoline market

JEL-codes: C22; C24; C25; E31; F14; L71

45 pages, September 17, 1997

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