Response of Italian Domestic Heating Oil Market to Variations in Crude Oil Costs: Symmetric or Asymmetric?

Abstract

This study examined the Italian domestic heating oil market for evidence of asymmetric price adjustment and rent-seeking following changes in crude oil costs. The study adopted the recently developed nonlinear autoregressive distributed lag (NARDL) modeling framework, and used monthly time series data for the period January 2005 to December 2015. The findings reveal that the speed of adjustment was sluggish at 17% all through, which is typical of markets witnessing irregular behaviours such as collusion and rent-seeking. The results further indicate the presence of short-run additive asymmetry at 5% level only at pump, which is consistent with the rockets and feathers effect. However, the results did not show any evidence of long-run asymmetry or long-run rent-seeking. Even in the short-run, the results did not reveal any pattern of rent-seeking. Thus, the study concludes that the presence of sluggish speed of adjustment and rockets and feathers effect in the pump prices raise serious anti-trust issues. Accordingly, the study recommends that the market should be continuously monitored so that the dominant status of retailers like the Eni brand is not abused, thereby leading to less competition and collusive behaviours.

Keywords: Rockets and Feathers effect; Rent-seeking; Asymmetric Price Adjustment; Nonlinear ARDL model; Italy

JEL Codes: Q43; D40; C22; N94.

DOI: 10.7176/JETP/9-2-02