Smooth Transition Models in Price Transmission

Consumers complain that retail prices of petroleum products increase instantly whenever prices of crude oil increase but take a long time to fall after crude oil price decreases. This apparent discrepancy attracts significant attention in the applied literature, as it might imply a welfare transfer from individual consumers to big oil companies. Unfortunately, the way the “rocket and feathers” phenomena are modelled suffers from unrealistic assumptions. In this article we analyse the price transmission between energy products at different processing tiers in the European Union using innovative smooth transition models. We find previously missed patterns, consistent with transactional costs theories and casting some doubts on the negative welfare effect of asymmetric price transmission.