Rockets and feathers

Mike Moffatt explains why another investigation into gas prices isn’t likely to solve anything.

The gasoline market tends to exhibit a behaviour known as “rockets and feathers,” where prices are quick to rise (they rocket up) but are slow to fall (like a feather). The best explanation to why this occurs is from research by economist Matthew Lewis at Ohio State University. When the price of crude oil rises, gas stations must keep pace with those increases or else they will be selling gasoline below cost, since margins in retail gasoline are so low.

But why does this not also occur when oil prices fall? When crude oil prices are falling gas stations will initially offer a small cut in gasoline prices. Consumers are grateful for the falling prices and feel that they are getting a deal. This causes consumers to cut down on their comparison shopping for gasoline. Since fewer consumers are looking for the cheapest station at which to buy gas, this slows down the pressure for stations to lower prices.