This paper aims to provide those working in developing countries with a review of the issues that can help address the four questions: 1) are petroleum product margins excessively high at certain times?
2) Does asymmetry of price responses to cost changes exist and, if so, what are the possible reasons that could account for it?
3) If there is asymmetry of petroleum product price responsiveness, how large is the cost to consumers compared with symmetric pricing?
And 4) what policies can combat excessive petroleum product margins? The discussion focuses mainly on liberalized markets, because, in markets subject to price control, the pattern of responses of prices to cost changes will be determined partially or largely by the Government.
- Chapter one describes asymmetric pricing and the structure of the oil market, focusing in particular on the links between the retail sector and the rest of the chain of supply. The chapter next briefly reviews types of legislation that exist in liberalized markets to protect consumers from monopolistic or collusive behavior in petroleum products pricing.
- Chapter two describes different types of firms' pricing behavior, including both collusive and non collusive behavior, and provides an overview of how lags in pricing behavior arise and the reasons they can lead to asymmetry. Following this section on theories, econometric studies testing for the presence of asymmetric pricing are reviewed, with special reference to those studies carried out in developing countries. Based on these models, a sample calculation of the extra costs to the consumer of asymmetric pricing relative to those under symmetric pricing is given, including an illustration based on a specially constructed estimate for Guatemala.
- Chapter three provides an overview of policy responses to asymmetric pricing.