A study of Canadian retail gasoline prices

This thesis presents an analysis of the pricing behaviour of firms in Canadian retail gasoline markets. The time series of retail prices for certain Canadian cities can be categorized as exhibiting one of two distinct patterns. In many cities, retail prices remain unchanged for many weeks at a time, despite frequent changes to the wholesale gasoline price. In other cities, retail prices cycle, increasing sharply, and declining more slowly. This thesis addresses questions arising from the observation of these patterns. The first essay considers a theoretical model of price setting behavior, and asks whether the number of stations operated by each firm in a market can determine whether constant prices or price cycles are observed. Constant prices are found to exist only when firms are of similar size. On the other hand, cycle equilibria can be constructed when the firms are of similar size, but also when their sizes differ greatly. Evidence of a negative relationship between price stability and the presence of small firms is also found through an examination of a panel data set of retail prices for a number of Canadian cities. The second essay examines the response of retail prices to wholesale price movements in the presence of a retail price cycle. A simple model based on the predictions of the theory is constructed, and estimated using data for the city of Windsor, Ontario. I find that a new cycle is initiated by a price increase whenever the distance between the previous retail price and the current wholesale price becomes sufficiently small. In addition, retail prices are found to be more responsive to wholesale prices over the increasing portion of the cycle. Finally, when the asymmetric error correction model of Borenstein, Cameron, and Gilbert (1997) is estimated, a more rapid response to wholesale price increases than to decreases is indicated. This asymmetry is shown to be consistent with my structural model, which thus provides an additional potential explanation for the regularities found in previous studies.Arts, Faculty ofVancouver School of EconomicsGraduat