Reference Dependence in the Demand for Gasoline

By Laurence LevinMatthew S. LewisFrank A. Wolak
Journal of Economic Behavior & Organization
May2022 Vol. 197 Pages 561–578.

Consistent with the predictions of recent behavioral models of reference- or context-dependent preferences, we find that gasoline demand in the U.S. is up to three times more elastic when prices rise above their average over the previous year than when prices fall below this average. Reference-price effects vary substantially across cities with different demographic and commuting patterns. In cities where residents drive more, gasoline demand is less elastic but exhibits greater reference dependence. We also demonstrate that the asymmetric demand response generated by reference dependence can cause total gasoline consumption over a period of time to be lower when prices are more volatile than when prices exhibit the same average level but are more stable.