The economic significance of gasoline wholesale price volatility to retailers

- We examine the economic significance of retail to wholesale price asymmetries in the US retail gasoline market.
- We directly link changes in wholesale prices to firm margins and profits using a unique, firm-level dataset.
- The direction of wholesale price movements is a primary determinant of short-run firm profitability.
- It mostly is only in months of declining wholesale prices that retailers make meaningfully positive accounting profits.
- In months of rising or flat wholesale prices, retailers more-or-less break even.

We show that gasoline retailer profits heavily depend on the direction of wholesale cost movements. Using a unique, firm-level, proprietary sample of 121 U.S. gasoline retailers collectively operating over 4500 stores, we find that it tends to be only in months when wholesale prices are declining that retailers make meaningfully positive profits, and that in spite of the low profits earned when wholesale prices are increasing, over the entire wholesale price cycle, volatility is preferred by retailers to relatively stable wholesale prices. We are the first to our knowledge to link asymmetric price responses directly to firm profits and characterize the economic significance of asymmetric pricing in the retail gasoline industry. Our findings may have important implications for the scores of other industries where asymmetric retail-to-wholesale price responses are found.