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Rockets and feathers meet markup margins: Applications to the oil and gasoline industry
Author(s) -
Mann Janelle
Publication year - 2016
Publication title -
canadian journal of economics/revue canadienne d'économique
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.773
H-Index - 69
eISSN - 1540-5982
pISSN - 0008-4085
DOI - 10.1111/caje.12213
Subject(s) - markup language , margin (machine learning) , cointegration , economics , econometrics , perceived exertion , industrial organization , monetary economics , computer science , biology , machine learning , xml , operating system , heart rate , blood pressure , endocrinology
This article investigates the existence of asymmetric price transmission between crude oil, rack (wholesale) and retail gasoline prices. A threshold cointegration technique is used, with regime switches being triggered by the size of the markup margin. There is consistent evidence of band‐TAR in which the crude, rack and retail prices are free to diverge until the markup margin is squeezed or stretched beyond a lower or upper critical threshold. This finding indicates that abnormally high markup margins cannot be sustained, which provides evidence against market power exertion. The threshold error correction models indicate that there is no systematic relationship between the speed of adjustment back to the long‐run relationship and the markup margin, which rules out the existence of “rockets and feathers.”