Asymmetric Price Transmission and Rent‐seeking in Road Fuel Markets: A Comparative Study of South Africa and Selected Eurozone Countries

Abstract

This paper presents the first-ever analysis of South African and Eurozone road fuel markets for the possibility that firms may be manipulating the tax system to conceal rent-seeking behavior using the nonlinear ARDL model recently advanced by Shin et al. (2013). The paper also examines these markets for asymmetric price adjustment following changes in crude oil costs in the aftermath of the 2007-2008 Global Financial Crisis. Monthly data for gasoline, automotive diesel and costs of imported crude oil from November 2004 to August 2016 were used. The results indicate that while the Eurozone road fuel markets are fraught with the problems of long-run rent-seeking, rockets and feathers effect, and the possibility that firms may be exploiting the tax system to conceal rent-seeking behaviors, the South African markets are free from these problems. Even though South Africa and the Eurozone countries have high oil import dependency ratios, this paper shows that government regulatory activities somewhat account for the difference in market outcomes.

Are anticompetitive behaviours rampant in global retail energy markets? A study of price elasticity, asymmetric price adjustment and rent-seeking

“…These facts indicate that the demand for non-road fuels is generally more elastic compared to the demand for road fuels such that in economic terms, there should be more likelihood of rent-seeking and asymmetric price adjustment in the markets for road fuels. This categorization of retail petroleum products into road fuels and non-road fuels is consistent with the existing literature, including Greenwood-Nimmo and Shin [21] and Ogbuabor et al [2] . For the eight countries included in this study, Organisation for Economic Co-operation and Development (OECD) [52] conducted a country by country evaluation and found that price elasticity in their road fuel markets is generally low due to some structural factors, such as frequent and relatively small transactions with a fragmented demand side, high barriers to entry, symmetry between leading suppliers due to the vertical relations and nationwide presence of the companies (especially in Italy, Germany, and Spain, where dominant firms are quite visible in the downstream petroleum markets), and difficulties in setting up retail outlets and securing supplies of road fuels, among others.…”

“…Studies such as Borenstein et al [14] , Lee [54] , and Bachmeier and Griffin [32] , among others, give credence to this. More recent studies like Greenwood-Nimmo and Shin [21] and Ogbuabor et al [2] also applied this framework in modeling asymmetric price adjustments across various retail energy markets. The method is fundamentally an extension (in an asymmetric manner) of the linear ARDL framework for modeling equilibrium relationships initially advanced by Pesaran et al [55] (henceforth PSS).…”

“…well below 50%) or otherwise. This evaluation is particularly important because sluggish speed of adjustment has been generally associated with various forms of market failure in the literature, such as asymmetric price adjustment and rent-seeking [2] , [21] .…”

“…This benefit can be monetary or economic and it usually goes without giving anything in return to the society or the individuals through wealth creation. For example, the concept of rent-seeking has been pertinently used to describe the behavior of some retailers in the petroleum industry who obtain a subsidy 1 from the government on every litre of petroleum product they sell to the consumers, whereas they sell the subsidized products to consumers at prices that are far higher than the government approved prices [2] . Such retailers are known as rent-seekers and their price manipulation activities pose serious antitrust and consumer welfare challenges 2 .…”

“…For instance, the study identified bureaucrats, politicians, banks and investors as some of the key players. Quite recently, Ogbuabor et al [2] studied South African and selected Eurozone road fuel markets for the prevalence of rent-seeking behavior by retailers. This study established that while the Eurozone markets are fraught with this problem, the South African markets did not exhibit the problem.…”