Testing the Alchian-Allen Theorem: A Study of Consumer Behavior in the Gasoline Market

This paper uses a data set of daily sales at a single gasoline station over a seven year period to determine if consumers respond to relative price changes among the three grades of gasoline. Based on the reasoning of Alchian and Allen (1964) and Barzel (1976), market shares of higher quality gasoline should increase at the expense of regular grade gasoline when overall gasoline prices increase. The empirical results do not conform to this expectation. We find instead that the consumers in this sample responded to higher gasoline prices by switching to mid grade gasoline from premium grade gasoline leaving the market share of regular gasoline unchanged.Alchian-Allen Theorem

Do Gas Stations Raise Prices on the Weekend or Holidays?

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