Speed of adjustment and market structure

This paper studies the relationship between changes in costs and prices in the gasoline market in the Federal Republic of Germany 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. The study of price adjustments to cost changes involves the analysis of two inter-related 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 is that the first is negatively correlated to the degree of competition, and that the second 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; (b) at the consumers' level, the speed of adjustment was lower when the ex-refinery price was declining than when it was rising; the adjustment lag was about 6.07 months when ex-refinery prices were declining and 5.37 months when they were rising. (author)