THE DEMAND FOR TRANSPORTATION FUELS - IMPERFECT PRICE-REVERSIBILITY

This paper examines the price-reversibility of fuel demand for road tr ansport. The analysis is based on an econometric model which utilizes price-decomposition techniques to measure separately the effects of di fferent types of price increases and decreases. The methods proposed a llow empirical testing of irreversibility and certain forms of hystere sis in demand relationships. The results lend strong support to the no tion that consumers do not necessarily respond in the same fashion to rising and falling prices, nor equivalently to sudden and substantial price rises as to minor price fluctuations: demand is not necessarily reversible to price changes. This finding severely challenges the equi librium basis of the traditional, reversible demand model. In the part icular example used, the results indicate that consumers have reacted more strongly to the price rises of the seventies, than to other price rises, and that the resulting fuel reductions will not be totally rev ersed as prices return to lower levels. The results also show that, if irreversibilities do exist, the use of reversible, symmetric models w ill produce biased elasticity estimates, not only for prices, but for other variables as well. The methods used in this analysis should be a pplicable to more detailed analysis of travel behaviour, where asymmet ry of response or persistence of effect may be relevant. The existence of price asymmetries will have important implications for fuel use in transport, as well as for traffic growth, and particularly for evalua ting the impact of price-related transport policy. It will also affect the possibility of estimating price elasticities and forecasting dema nd on the basis of historic data. Copyright (C) 1996 Elsevier Science Ltd