Asymmetric Exchange Rate and Oil Price Pass-Through in Turkish Fuel Oil Market

In this paper, we revisit the unsettled discussion of whether retail fuel oil prices respond asymmetrically to oil price shocks. Using a novel micro approach that considers each price spell separately; we find evidence of pass-through asymmetry in the fuel oil market in Turkey. With our approach it is possible to analyze asymmetry at various other grounds including source and size of the cost shock. We show that exchange rate (oil price) is the main factor fueling asymmetry in case of cost increases (decreases). Also, if the magnitude of positive cost shock is higher, pass-through will be lower. Finally, empirical evidence suggests that pricing behavior in terms of pass-through degree and asymmetry varies across firms. The market power of the firms is suggested as the main explanation of the asymmetry, yet there are factors limiting the use of market power in price setting.