Dynamics of the gas retail market under China's price cap regulation. (March 2023)

• Record Type: Journal Article
• Authors: Cui, Jian; Yang, Hanfang; Wang, Yifan; Yang, Caili
• Is Part Of: Energy policy. Volume 174(2023)
• Publication Date: 2023-03
• Subjects: Price cycles -- Price cap regulation -- Asymmetry -- Gas retail market; K23 -- L51 -- L11 -- L81; Energy policy -- Periodicals; Politique énergétique -- Périodiques; Electronic journals; 333.79
• DOI: 10.1016/j.enpol.2023.113424
• Languages: English
• ISSNs: 0301-4215

Abstract

Abstract: To stabilise gas prices and safeguard consumer interests, China introduced a new price cap regulation for the gas retail market in 2013. This study is the first to evaluate the impact of this price cap regulation on the dynamics of retail gas prices. By using an asymmetric error correction model and Markov-switching regression based on daily gas-station-level price data from Inner Mongolia, China, we establish that retail prices respond asymmetrically to price caps, rather than crude oil prices, implying that price caps may serve as focal points for gas stations to collude tacitly. Additionally, the cyclic nature of retail prices is not obvious under the price cap regulation, which provides some evidence for the buffering effect of price caps on price cycles. Finally, we establish that price cycle characteristics differ by gas station and brand. These results may provide a better understanding of retail price dynamics in a price-cap-regulated market and guide policymakers and planners in optimising regulatory policies. Highlights: The dynamics of gasoline retail price under price cap regulation are examined. The asymmetric response of retail prices to the price ceiling is estimated. Results indicate a weak price cycle under price cap regulation. There is a need for differentiated regulatory policies to improve market efficiency.