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What do one hundred million transactions tell us about demand elasticity of gasoline?

Vesal, M ; Sharif University of Technology | 2022

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  1. Type of Document: Article
  2. DOI: 10.1007/s00181-021-02122-3
  3. Publisher: Springer Science and Business Media Deutschland GmbH , 2022
  4. Abstract:
  5. The price elasticity of gasoline demand is a key parameter in evaluation of various policies. However, most of the literature uses aggregate data to identify this elasticity. Temporal and spatial aggregation make such elasticity estimates biased. We employ a unique dataset of all gasoline transactions in Iran during a 4-month period around an unexpected exogenous price change to identify that price elasticity. We also identify a significant withholding behavior by consumers in response to anticipated price changes. The consumers reduce or postpone their purchases when they expect a decrease in prices. Controlling for date fixed effects would eliminate homogeneous withholding responses. However, heterogeneous responses to this anticipated price change would lead to an overestimation of price elasticity. After controlling for date, individual, and location fixed effects as well as the withholding behavior, we estimate a robust significant price elasticity of − 0.085. Aggregation of the same data by week, month, and city yields an estimate of − 0.3, indicating a significant bias in earlier studies. © 2021, The Author(s), under exclusive licence to Springer-Verlag GmbH Germany, part of Springer Nature
  6. Keywords:
  7. Gasoline demand elasticity ; Subsidy ; Transaction-level data ; Withholding behavior ; Consumption behavior ; Demand elasticity ; Energy market ; Price dynamics ; Pricing policy ; Spatiotemporal analysis ; Iran
  8. Source: Empirical Economics ; Volume 62, Issue 6 , 2022 , Pages 2693-2711 ; 03777332 (ISSN)
  9. URL: https://link.springer.com/article/10.1007/s00181-021-02122-3