Demand for gasoline is one of the more intensively researched topics in energy economics. Many studies using a variety of methods have been carried out to improve the accuracy of the findings. Interestingly, there has yet to be any studies that attempt to determine the substitutability between gasoline of different grades. Such knowledge is needed to be able to examine the inefficiency caused by a fuel pricing policy that has a different subsidy rate for different grades of gasoline. Most studies in the literature treat regular, midgrade and premium gasoline as a single commodity, while diesel and ethanol are occasionally treated as substitutes. We have found only two demand studies, Fullerton et al. (2015) using Mexican data and Hastings et al. (2013) using U.S. data, that consider regular and premium gasoline as separate products. However, neither attempts to estimate the cross-price elasticity. The contribution of this essay is to build upon and improve the one study we found (Fullerton et al. 2015) that estimates gasoline demand own-price elasticities by grade for Mexico. We improve on their seminal work by specifically estimating both own and cross-price elasticities for regular gasoline. We are also able to increase the sample size and will perform much more substantive statistical testing including tests for structural change, adjustments for seasonality, and tests for stationarity and cointegration. Further, we test the assumption that the prices set by the government are exogenous because the government might respond to market conditions. The cross-price elasticities between regular and premium gasoline is found to be 0.875, which confirms high substitutability among gasoline with different grades.
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