Rockets & Feathers: The Asymmetric Speed of Adjustment of UK Retail Gasoline Prices to Cost Changes

The determination of retail gasoline prices in the UK has long been the subject of debate. There have been three inquiries by the Monopolies and Mergers Commission (MMC), leading to the publication of the reports MMC (1965), (1979) and (1990), in which the industry was examined for evidence of non-competitive pricing and collusive behaviour. In the most recent inquiry a major point of concern was the suggestion that companies used their market power to set prices unjustifiably high relative to costs. In particular, it was suggested that when faced with cost increases companies rapidly adjusted prices upwards, but when faced with cost decreases they adjusted prices downwards more slowly, thus permitting a temporary level of high profits. This hypothesis was examined informally by the MMC, which found no evidence that the average delays of adjusting to cost increases and cost decreases were different. It also argued that in the cost increase case there was an initial delay followed by a rapid adjustment, while in the cost decrease case downward price adjustment started sooner but in a series of smaller steps. This
asymmetrical pattern of adjustment, termed “rockets and feathers”, was not established through econometric work but with the help of descriptive and graphical analysis of weekly company data for the period 1987-9 (MMC (1990) paras. 4.69-4.79).

By: R. Bacon

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