Time lags in the pass-through of crude oil prices: big data evidence from the German gasoline market

ABSTRACT

This article investigates the pass-through of global Brent oil notations to fuel prices across the oligopoly of retail majors in Germany. We assemble a high-frequency panel data set that encompasses millions of price observations and allows us to distinguish effects by brand. Upon establishing a cointegrating relationship between fuel and crude oil prices using daily data, we estimate an ECM and find that (1) the pass-through of oil prices critically depends on the number of time lags included in the ECM; (2) strict adherence to classical information criteria for determining lag length yields extremely long pass-through durations and (3) the estimated impulse response functions are virtually identical across brands, irrespective of the lag count, suggesting a high degree of competition among brands.

KEYWORDS:

• Retail markets
• competition
• ECM

JEL CLASSIFICATION:

• D12
• Q41

Acknowledgement

We are grateful for invaluable comments and suggestions by Christoph M. Schmidt and Reinhard Madlener.

Notes

¹ For more information on the Market Transparency Unit for Fuel (Markttransparenzstelle für Kraftstoffe, MTS-K), see http://www.bundeskartellamt.de/EN/Economicsectors/MineralOil/MTU-Fuels/mtufuels_node.html.

² Using a Markov switching regression framework, Lewis and Noel (2011, 672) argue that in markets that exhibit price cycles, distributed lag models, such as the ECM, are unable to capture the large and periodic changes in retail margins.

Additional information

Funding

This work has been supported by the NRW Ministry of Innovation, Science, and Research (BMBF) within the framework of the project ‘Rebound effects in NRW’ and by the Collaborative Research Center ‘Statistical Modeling of Nonlinear Dynamic Processes’ (SFB 823) of the German Research Foundation (DFG), within the framework of Project A3, ‘Dynamic Technology Modeling’.