"Retail price behaviour in the Spanish fuel marketRegional pass-through and ""rockets and feathers"" phenomenon"

Resumen

During the last few decades, the Spanish fuel market has undertaken relevant reforms oriented at intensifying competition, according to which a state-owned monopoly was dismantled to make way for the privatization and liberalization of the sector. While there was a notable entrance of new competitors during the process of liberalization, the dominance of a few vertically-integrated companies has remained to date. Nowadays, there exists an open debate about whether fuel prices behave efficiently or not. In this regard, the present thesis has attempted to contribute to the discussion by analysing the magnitude and speed of adjustment of final fuel prices to international oil shocks. In the first part of the thesis (Chapter 1), we have explored whether the retail oil markets are integrated at the regional level by performing a comparative analysis of the transmission of international wholesale oil prices to retail oil prices. To do so, we have used a set of panel data for diesel fuel retail prices, which is composed of daily information from 2008 to 2010 across each of the Spanish regions (i.e., NUTS 3). We have applied a fixed-effects model with cross-sectional dependence correction (i.e., Driscoll and Kraay (1998) standard errors) to control for unobserved heterogeneity and to take into consideration the possible spatial dependence among regions. Empirical evidence shows that the transmission of international wholesale price shocks to retail oil markets is idiosyncratic for regions, which suggests the presence of entry barriers that could segment the regional markets. Furthermore, we also found that cost pass-through is more similar for those provinces belonging to the same autonomous community (NUTS 2). These findings indicate that different regulations and criteria regarding the granting of administrative authorizations from the autonomous communities could be hindering the integration of geographical markets. The presumed existence of administrative barriers at regional level could have harmful effects on the economy as a whole. On the one hand, it could discourage fuel firms from improving their allocative and productive efficiency, which would lead to losses in social welfare. On the other hand, it could also imply unequal opportunities for those firms with a low capacity to pressure the autonomous government. In the second part of the thesis, we have examined pattern asymmetries in the speed of transmission of international wholesale oil prices to retail fuel prices. The delay in retail price reductions when international wholesale prices decrease is often attributed to an abuse of market power by sellers, even though competitive situations could also derive in price asymmetries (i.e., inventories management, accounting practices or consumers¿ behaviour). In the case of Spain, however, the high concentration of the market leaves little room for doubt about the relationship between price asymmetries and lack of competition. Unfortunately, the empirical evidence on price asymmetries provided by scholars so far is not conclusive. The following chapters of this dissertation have tried to contribute to the literature on this issue by paying particular interest to the econometric advantages derived from using databases with unprecedented levels of temporal and cross-sectional disaggregation for the Spanish case. In Chapter 2, we have analysed the presence of price asymmetries by using time series for daily averaged retail prices of gasoline and diesel fuel in Spain from 2006 to 2009. Results are robust to two alternative specifications of an asymmetric ECM, for which the presence of autoregressive conditional heteroskedasticity for disturbances is modelled by a GARCH(1,1) process. Evidence indicates that the short-term transmission of wholesale prices to retail prices is quite symmetric for both gasoline and diesel fuel. Nevertheless, in contrast to some of the results provided by other authors for an earlier period, no asymmetries were found in the speed of retail price responses toward long-run equilibrium. Our evidence also suggests that the use of weekly (or lower frequency) data is one of the possible explanations for some of the seemingly contradictory results in the literature concerning this issue. This is in line with the findings by Bachmeier and Griffin (2003) and Bettendorf et al. (2003) based on price series for USA and the Netherlands, respectively. In Chapter 3, we have studied the effect of cross-sectional aggregation of data on the estimation and testing of asymmetric retail fuel price responses to wholesale price shocks. The analysis is performed on panel data collected daily from individual diesel fuel stations in the Spanish metropolitan areas of Madrid and Barcelona from 2010 to 2012. While the standard OLS estimator is applied to an ECM in the case of the aggregated time series, we use the mean group approaches developed by Pesaran and Smith (1995) and Pesaran (2006) to estimate the short- and long-run micro-relations under heterogeneity. We found remarkable differences between the results of estimations using aggregated and disaggregated data, which are highly robust to both datasets considered. On the one hand, it is shown that the typical estimation with aggregated data tends to artificially slow down the speed response of retail fuel prices after an isolated shock of wholesale oil price, which is consistent with evidence obtained for others products for which price transmission has been studied (e.g., Peltzman, 2000; Cramon-Taubadel et al., 2006). This result could help to explain the surprising permanence of shocks in many studies in this research area. On the other hand, it is also evidenced that the estimates based on aggregated data contain fewer degrees of freedom and sample variability. Obviously, it generates a loss of efficiency in econometric estimates that may be sufficiently large to hide the existence of significant price asymmetries. In addition, it is worth mentioning that the empirical evidence that emerges from the most accurate estimates with disaggregated data is in favour of the presence of price asymmetries, consistent with the ¿rockets and feathers¿ phenomenon. At least in the metropolitan areas of Madrid and Barcelona, it is revealed that, during the two weeks after an input price shock, upward adjustments of retail prices are significantly faster than the corresponding downward adjustments. REFERENCES: Bachmeier, L.J., Griffin, J.M., 2003. New evidence on asymmetric gasoline price responses. Review of Economics and Statistics 85, 772-776. Bettendorf, L., Van der Geest, S.A., Varkevisser, M., 2003. Price asymmetry in the Dutch retail gasoline market. Energy Economics 25, 669-689. Cramon-Taubadel S., Loy, J.P., Meyer, J., 2006. The impact of cross-sectional data aggregation on the measurement of vertical price transmission: An experiment with German food prices. Agribusiness 22, 505-522. Driscoll, J.C., Kraay, A.C., 1998. Consistent covariance matrix estimation with spatially dependent panel data. Review of economics and statistics 80, 549-560. Peltzman, S., 2000. Prices rise faster than they fall. Journal of Political Economy 108, 466-502. Pesaran, M.H., Smith, R., 1995. Estimating long-run relationships from dynamic heterogeneous panels. Journal of econometrics 68, 79-113. Pesaran, M.H., 2006. Estimation and inference in large heterogeneous panels with a multifactor error structure. Econometrica 74, 967-1012.