Taxes, cost and demand shifters as determinants in the regional gasoline price formation process: Evidence from Spain

This paper examines the pass‐through of regional tax changes and spot price variations to regional gasoline prices in Spain. It also analyzes the impact of all major cost and demand shifters that contribute to regional gasoline price formation. To address these research issues, a reduced form price equation using monthly time‐series cross‐sectional (TSCS) data from January 2004 through December 2008 is estimated. Strong and consistent evidence of full shifting of regional tax changes to regional gasoline prices is found. Gasoline spot price changes are more than proportionally passed through to retail prices. In addition, the empirical evidence shows, on the one hand, that regional gasoline price differences before taxes continue to be quite narrow and, on the other hand, that there is still a margin for larger gasoline price differences among regions. This suggest that ‘traditional practices’ from the monopoly era (i.e. relatively uniform regional gasoline prices) persist after the market has been liberalized, which may have been facilitated by the strong and uniform presence of the major Spanish‐based refining companies in the retail sector over the whole country.