Testing the law of one-price in the US gasoline market: a long memory approach

Abstract

This paper aims to shed new light on "law of one-price" in the United States' gasoline market over the period June-2003-December-2019. Specifically, we test for convergence of the retail prices of gasoline in di↵erent US PADDs, states and cities using the Local Whittle estimator (LW) and its variants (Robinson 1995, Shimotsu and Phillips 2005). Mean/trend reversion of the relative price of each unit will imply convergence toward the average price in the US thereby o↵ering support for the law of one-price. LW estimators allow us to consider the case where relative gasoline price are fractionally integrated process and may display long memory implying a slow process of convergence. The results obtained generally o↵er support for the law of one-price albeit with significant di↵erences in the rate of convergence between PADDs, States and Cities.