Asymmetric Price Adjustments in a Deregulated Gasoline Market

Abstract

This paper employs ordered probit, partial adjustment, and vector error correction models to characterize price adjustments in the Philippine retail gasoline market since its deregulation. It finds that pricing decisions of oil firms depend significantly on eight weeks of previous changes in crude cost. It shows that the speed of adjustment of retail prices to their long-run equilibrium relation with crude cost has been following an accelerating trend but is vulnerable to intervening factors. Lastly, it provides empirical evidence that pump prices respond more quickly and fully to increases in crude cost rather than to decreases.

JEL classification: D40, L11, L81