Edgeworth Price Cycles

Abstract

Edgeworth price cycles refer to an asymmetric pattern of prices that result from a dynamic pricing equilibrium among competing oligopolists. The resulting time series takes on a sawtooth shape – many small price decreases interrupted only by occasional large price increases. Maskin and Tirole (Econometrica 56(3): 571–599, 1988) formalized the theory, and later extensions were provided by Eckert (International Journal of Industrial Organization 21(3): 151–170, 2003) and Noel (Journal of Economics and Management Strategy 17(2): 345–377, 2008). Edgeworth price cycles are the leading theory for explaining the asymmetric price cycles that appear in many US, Canadian, Australian and European retail gasoline markets (e.g. Noel (Review of Economics and Statistics 89(2): 324–334, 2007a), Eckert (Canadian Journal of Economics 35(1): 52–77, 2002), Doyle et al. (Energy Economics 32(3): 651–660, 2010), Wang (Journal of Political Economy 117(6): 987–1030, 2009b)). While the gasoline cycles continue to generate public concern with claims of collusion often raised, the current evidence favours Edgeworth price cycles being the result of stronger competition and the source of lower retail gasoline prices.