Sticky prices and market power in gasoline market in Nairobi

Abstract

Are Nairobi gasoline retail prices downward sticky? Do gasoline prices in Nairobi rise

faster than they fall in response to upstream cost shocks? These are important research questions this study seeks to answer. The study is motivated mainly by the unrelenting agitation for reintroduction of price controls in the petroleum market in Kenya premised on the view that gasoline retail prices do not respond to the market fundamentals. The study undertakes a price passthrough analysis to ascertain presence of Amount Asymmetry (whether upstream cost changes are NOT fully transmitted to the retail level) and Pattern Asymmetry (whether crude oil price increases are transmitted faster and more efficiently than crude oil price decreases). The study finds no evidence of amount asymmetry but pattern asymmetry was found to be prevalent. This implies that indeed retail gasoline prices in Nairobi rise faster than they fall. The policy import of this finding is that presence of pattern asymmetry imputes an asymmetry cost to consumers in periods of price volatility (Borenstein et ai, 1997).

In addition, the paper probes whether gasoline pricing in Kenya is influenced by a cartel­ like behaviour in the industry by introducing a market concentration parameter, the Herfindahl-Hirshman index (HHI) into the pass-through model. HHI for the industry is found to be in the range associated with either oligopoly or monopolistic competition. In addition, econometric results show that the index has a significant negative influence on gasoline price adjustments, implying that presence of pattern asymmetry in Nairobi retail prices can be ascribed to market power.