Asymmetric price adjustments in US gasoline markets: impacts of spatial dependence on the ‘rockets and feathers’ hypothesis

Abstract

Gasoline retail prices show sometimes wild, asymmetric fluctuations over time. We explore the impact of spatial dependence on gasoline retail price formation by using for the first time an asymmetric spatial error correction model (ASpECM). We find evidence that the generally assumed symmetric price pattern is fully reversed when we account for spatial spillover effects, indicating that retail prices adjust more rapidly in an upward than in a downward direction. This finding suggests that empirical studies that ignore the role of spatial dependence and local competition may miss an important element of the nature of the gasoline price adjustment mechanism.