Do Retail Gasoline Prices Go Up Faster Than They Come Down?

Michael Giberson

Usually, retail gasoline prices do go up faster than they fall. Martha White, in Slate’s Explainer column, explains:

Analyses of gasoline economics show that when the price of oil rises, it takes up to four weeks for gas station prices to catch up, with most of the increase taking place within the first two weeks. But when oil prices sink, it takes up to eight weeks for the savings to be passed along to consumers. The phenomenon is known as “asymmetric price adjustment” (PDF) or, more informally, “rockets and feathers.”

… The stations can’t raise prices too much, though, because consumers tend to be extra-vigilant about shopping for bargains when oil prices are on the rise. … The asymmetry that economists cite comes into play as soon as oil prices start to deflate. Freed from the constant reminders about rising fuel costs, drivers become less invested in looking for a bargain…. [Links in original]

It is a great time for a “rockets and feathers” reminder. If consumers remain diligent about seeking out the lowest available price, maybe retail prices will drop more like a rock than a feather.

Matthew Lewis’s work (the first link in the quote) finds that the “rockets and feathers” phenomena can be well explained simply by considering consumer search behavior. As I explained in an earlier post (the second link in the quote), when retail prices are rising consumers tend to shop harder for the best price; when prices are falling consumers search less — they are more likely to be happy with the first slightly lower price they find. So typically retail prices get pushed up quickly when the wholesale price increases, and then drift down slowly as wholesale prices fall because consumers are not so diligent in searching out the lowest possible price.

(In more recent work, Lewis concludes that it isn’t so much whether the wholesale price is going up or going down, but the size of the retailer’s margin that is most important. However, the profit margin is usually low when prices are going up, and higher when prices are going down, so the typical pattern is observed.)

Have you found yourself thinking: “Wow, gasoline only $3.89 a gallon! Great deal!”?

Before you fill up, remember that before about 9 weeks ago, gasoline prices in the U.S. had never been so high.* Check a few more stations, continue to use, and help keep the downward pressure on retail prices.

Strictly speaking, consumer search puts downward pressure on retailer profit margins and only indirectly pressures wholesale gasoline prices that the retailers pay. To get real top-to-bottom pressure on gasoline prices, as the friendly folks over at Environmental Economics will advise: “Drive Less!

*Based on weekly average U.S. price data for regular grade gasoline from the Energy Information Administration.