Could Price Comparison Apps Be Making Gas MORE Expensive? | The Professor Is In
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What is the main topic discussed in this episode?
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I'm Megan Connors.
And I'm Justin Wolfers. This is The Professor is In. Think of this as office hours where I'm here to answer your questions.
Last week, you proved that gas prices do indeed rise like rockets, but fall like feathers as they respond to changes in the cost of oil. Today, we're going to answer some follow-up questions on the topic. Okay, so first question. This asymmetric pattern of rising like rockets, falling like feathers, is that something we typically just see with gas prices, or does it show up more broadly in other places?
You always expect me to know everything about every product. That's hard. So when oil prices rise, the cost of producing gas rises. And what happens is gas rises very, very quickly. A lot of the adjustment happens within a week. There's been a lot of that happening with the Iran war. When oil prices fall, which by the way happens whenever we think peace might break out, Gas prices don't fall immediately. They seem to drop like a feather. And to those of us who buy gas, that's very frustrating. So it's been most clearly found for gasoline. There's research also showing it happens for diesel. Now, you might say, well, there's still a whole rest of the economy. For the rest of the economy, the biggest friction with pricing is actually a slightly different one.
There might be some of this. I'm not sure. I don't think there's enough nerds running enough regressions. I never think there's enough nerds running enough regressions. But the biggest friction in the rest of the economy is actually business conditions change and prices stay the same. That price stickiness, that's the word we use, is actually a really important driver of what happens to the macro economy. Okay. So what happens is the economy starts to boom. People want to buy more stuff or costs go up, but firms keep their prices fixed. The typical duration of a price in the economy is round about 12 months. So it's not like shopkeepers are out there saying, something changed, let me get out my price changer.
Prices really get stuck for quite a long time. Now, you and I can think about lots of reasons, and I think folks at home can think about lots of reasons, like you don't want to pay the cost of changing your prices, or that's not a big thing, but it frustrates your customers. There's a lot of possible reasons. What's equally interesting is how this disrupts the logic of markets. When we teach introductory economics, we talk about supply and demand, and then there's an equilibrium price where supply equals demand. When we move to macroeconomics, we talk about the ups and downs of the business cycle, which sounds like we're not getting to that happy equilibrium. Well, if a lot of businesses are keeping their prices stuck for quite a long time, the supply and demand dynamics that get us back to equilibrium get stuck.
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Chapters
4 chapters
1
What is the main topic discussed in this episode?
0:00–4:17
2
Does the 'rockets and feathers' pattern appear only in gasoline markets or elsewhere?
4:17–10:20
3
How does price stickiness (menu costs) explain slow price declines across the broader economy?
10:20–20:52
4
Could digitalization be making prices less sticky over time?
20:52–28:06
Speakers
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