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Reference Dependence in the Demand for Gasoline

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Program on Energy and Sustainable Development, page(s): 25

July 17, 2019

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Recent behavioral models of reference-dependent or context-dependent preferences have posited that consumers form reference points or consideration sets based on expectations. We investigate this hypothesis empirically within the retail gasoline market. Given that gasoline consumers have been shown to form price expectations based on past price lev- els, reference- or context-dependence would likely cause gasoline demand to become more price-sensitive when prices are high relative to the recent past (i.e., higher than expected). Consistent with these predictions, we find that gasoline demand in the U.S. is up to three times more elastic when prices rise above their average over the previous year than when prices fall below this average. Reference-price effects vary substantially across cities with different demographic and commuting patterns, and cities that have less elastic demand for gasoline are shown to exhibit greater asymmetry in demand responsiveness. These findings provide valuable new evidence to support recent developments in the behavioral litera- ture and also broaden our understanding of the factors affecting temporal and geographic heterogeneity in the price responsiveness of gasoline demand and the influence of price volatility on overall gasoline consumption.

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