Reference no: EM133082986

A few years ago, Jose Manuel Soria, Spain's Minister of Industry, Energy, and Tourism, announced that his department was ready to protect consumers from abusive pricing policies by gas companies. Mr. Soria added:

"It cannot be the case that when international oil prices go up, then gas companies pass on these price hikes to the consumer right away; but when international oil prices go down, consumers do not profit as quickly from the declining prices.... This is embarrassing to our nation..."

To a first approximation, these pricing patterns are observed in many other free-market countries.

It seems that Mr. Soria is just calling attention to what everyone knows. But is Mr. Soria operating under sound economic principles? In other words, do these pricing policies make sense under basic finance/economic (free-market) postulates without a need to assume monopoly power? Hint: These markets are called "rockets and feathers." In our case, there is asymmetric pricing because consumers are inelastic (need to consume gas every day) and producers are elastic (they would wait if they think that the price will go up).