Asymmetric Pass‐Through and Competition

ABSTRACT We study the retail price pass‐through of four major tax changes in petroleum products using daily pricing data from gas stations on small Greek islands. We find that (i) the pass‐through of the tax hikes is five times higher than for the tax decrease, (ii) the pass‐through of the tax hikes increases with competition, while that of the tax decrease does not, (iii) there is significant asymmetry in the speed of price adjustments, and (iv) the asymmetric price adjustment can be rationalized by either tacit collusion or consumer search behavior, as the most plausible explanations.