Gas price theory
Earlier, in my Ungouging post, I proposed a model in which independents lead the price raises in order to preserve their stocks during a decline in refinery output. Since I wrote that comment, I discovered something about who leads the prices. In "Retail Gasoline Price Cycles across Spatially Dispersed Gasoline Stations" (JLE Vol 47, April 2004) Andrew Eckert and Douglas S. West describe something called Edgeworth Price Cycles. An Edgeworth cycle is characterized by constant undercutting of prices until they hit the marginal cost, at which point someone will restore prices to a higher point, after which the undercutting begins anew. The larger competitors usually attempt to restore the prices, and let the independents lead the undercutting.
However, if I am correct in saying that independents drive the price increases in crisis situations, then this indicates a change in strategy. In Edgeworth cycling, as I understand it, the majors initiate price increases, but I have the independents initiating the price increase in the crisis. These aren't necessarily contradictory: the majors are initiating a restoration to a "preferred" or "normal" or equilibrium in Edgeworth cycling, whereas in the crisis a new equilibrium is being sought. The new equilibrium is probably understood as a temporary equilibrium that will fall as the crisis passes until we return to Edgeworth cycling. Still, this would be a switch in strategy from "fighting for market share by initiating undercutting" to "maintaining cash flow to get through a crisis".
If my theory is correct regarding the negative effects anti-gouging laws would have on independents, and if I can believe the welfare implications in Michael Noel's Edgeworth Price Cycles, Cost-based Pricing and Sticky Pricing in Retail Gasoline Markets", then I think this would imply that anti-gouging laws would be decidedly bad. On the other hand, if the majors initiate the price rises in the crisis, and the brunt of anti-gouging laws actually do or can be made to fall on them (a mighty big "if"), that may have a different effect on welfare, though I'm not sure exactly what it would be. At the very least, I think it means queues during a crisis, with a differential welfare impact on the working poor than on the rest of us. For the sake of clarity, their time being less valuable*, they can better afford to sit in line than pay higher prices, albeit with some impact on their personal lives.
So my question is, "Who initiates the price searches during a crisis?" We would need prices reported constantly, probably at least twice per day, from before a crisis period and then throughout its resolution, judging from some of the literature I've been reading on Edgeworth cycling. Seems like a good project for someone looking for research fodder because it would require finding a market demonstrating regime switching (Edgeworth) that switches to an entirely different meta-regime (equilibria seeking in a crisis), gathering data in several markets where independent presence in the market varies, and gathering data on the credible threat of anti-gouging prosecution in those same areas. Eckert and West used gastips.com, while another researcher's wife collected the data. Web-based gasoline collection sites are notoriously spotty, while few people's spouses would be willing to constantly travel around recording gas prices before and during a gasoline crisis.
* By "less valuable", I mean that using their normal wages it is less costly to a low-wage laborer than to a $400/hour lawyer to sit in line. I often wonder whether that is a very useful view of things. After all, if the lawyer is late to work, he probably won't lose his job. When a single working mother sits in a doctor's office for 4 hours, whose time is really worth more? On the other hand, who is more hurt by higher fuel prices - the lawyer or the laborer? Keep in mind that these aren't the only strategies open to them: there is always carpooling, public transport, etc.
However, if I am correct in saying that independents drive the price increases in crisis situations, then this indicates a change in strategy. In Edgeworth cycling, as I understand it, the majors initiate price increases, but I have the independents initiating the price increase in the crisis. These aren't necessarily contradictory: the majors are initiating a restoration to a "preferred" or "normal" or equilibrium in Edgeworth cycling, whereas in the crisis a new equilibrium is being sought. The new equilibrium is probably understood as a temporary equilibrium that will fall as the crisis passes until we return to Edgeworth cycling. Still, this would be a switch in strategy from "fighting for market share by initiating undercutting" to "maintaining cash flow to get through a crisis".
If my theory is correct regarding the negative effects anti-gouging laws would have on independents, and if I can believe the welfare implications in Michael Noel's Edgeworth Price Cycles, Cost-based Pricing and Sticky Pricing in Retail Gasoline Markets", then I think this would imply that anti-gouging laws would be decidedly bad. On the other hand, if the majors initiate the price rises in the crisis, and the brunt of anti-gouging laws actually do or can be made to fall on them (a mighty big "if"), that may have a different effect on welfare, though I'm not sure exactly what it would be. At the very least, I think it means queues during a crisis, with a differential welfare impact on the working poor than on the rest of us. For the sake of clarity, their time being less valuable*, they can better afford to sit in line than pay higher prices, albeit with some impact on their personal lives.
So my question is, "Who initiates the price searches during a crisis?" We would need prices reported constantly, probably at least twice per day, from before a crisis period and then throughout its resolution, judging from some of the literature I've been reading on Edgeworth cycling. Seems like a good project for someone looking for research fodder because it would require finding a market demonstrating regime switching (Edgeworth) that switches to an entirely different meta-regime (equilibria seeking in a crisis), gathering data in several markets where independent presence in the market varies, and gathering data on the credible threat of anti-gouging prosecution in those same areas. Eckert and West used gastips.com, while another researcher's wife collected the data. Web-based gasoline collection sites are notoriously spotty, while few people's spouses would be willing to constantly travel around recording gas prices before and during a gasoline crisis.
* By "less valuable", I mean that using their normal wages it is less costly to a low-wage laborer than to a $400/hour lawyer to sit in line. I often wonder whether that is a very useful view of things. After all, if the lawyer is late to work, he probably won't lose his job. When a single working mother sits in a doctor's office for 4 hours, whose time is really worth more? On the other hand, who is more hurt by higher fuel prices - the lawyer or the laborer? Keep in mind that these aren't the only strategies open to them: there is always carpooling, public transport, etc.
Labels: energy
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