Asymmetric Pricing Dynamics with Market Power:Investigating Island Data of the Retail Gasoline Market

It is well-documented that gasoline prices respond more quickly to cost increases than to cost declines. This paper investigates how and why such a link between mar-ket power and asymmetric pricing dynamics occurs. Exploiting a unique station-level panel data set from the Korean retail gasoline market, we propose geographical separa-tion as a reliable measure of market power. Focusing on gas stations located on islands around the peninsula, the measure naturally restricts spatial competition among them, thus providing them with market power. Our findings confirm a positive correlation between market power and price-response asymmetry. In addition, we provide direct evidence of tacit collusion by investigating stations’ sticky pricing behaviors and sug-gest that the tacit collusion is the main channel through which market power influences asymmetric pricing. We further find evidence that tacit collusion plays an important role in determining asymmetric pricing dynamics even in relatively competitive mar-kets. Finally, our analysis shows that market power negatively affects the relationship between margins and price dispersion.