Feather effect – What is it, definition and concept | 2022

The feather effect consists of a phenomenon by which there are slow reductions in the prices of a finished product. These drops do not correspond to the falls that occur in the raw materials from which it comes.

In this way, we are facing a situation that occurs in the economy of many countries, and that a priori seems contradictory. Thus, we start from a drastic drop in the price of the base product that should, in principle, be reflected in significant drops in the prices of final products.

However, this effect shows a result that does not seem to make sense. The prices of that finished product are reduced, but slowly. This has an economic explanation and, in addition, there are a number of factors that lead to this situation.

Factors that cause the feather effect

In economics there are always different variables that affect the same phenomenon. Explaining it from a single point of view leads to biased and limited analyses. Therefore, we are going to explain some of the most relevant factors that affect the feather effect.

  • The markets for the raw material and the finished product. Both work in a different way, since their prices fluctuate in different markets. Therefore, a drop in the price of one may not be reflected in that of the other, at least with the same intensity.
  • The exchange rate of the different currencies. There may be a situation in which the raw material is quoted, for example, in dollars and the finished product in euros. In this way, the fluctuation of those currencies will affect the price movements differently.
  • Fees and taxes. These represent a very high percentage of the final price in certain products. When prices vary, these taxes do not usually do so and that supposes a rigidity in a part of the price that slows down its decline.
  • The oligopoly. Companies that trade certain goods, such as electricity or gasoline, often have a privileged position in the market. Thus, they are few and with a high power, which means that they can avoid drastic price drops.
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Feather effect and rocket effect

The feather effect has its counterpoint in the rocket effect. If when the price of one falls, the price of the other does so slowly (pen), when prices rise, the opposite effect usually occurs. The prices of related products move up quickly and widely (rocket).

The factors that cause this are the same, but applied in reverse. For example, one of the most clearly seen is the aforementioned oligopoly. Economic theory teaches us that in these cases it is easier to raise prices than in a competitive market.

Example: Fuel price increases in Spain

Let’s see, to finish, the example of what has happened in Spain since the start of the pandemic in 2020. In this example we will analyze the prices of gasoline and what has happened in the international markets with crude oil, with the reference price of Brent oil.

  • In April 2020, the price of crude oil in international markets sank after the pandemic. However, in Spain the price of a liter of gasoline or diesel fell by just one cent, a clear example of the pen effect.
  • In November 2020, however, there was a rebound in the price of a barrel of oil, due to some economic recovery. In turn, this affected the price of fuel, which increased rapidly. We are facing the rocket effect.
  • Coinciding with the conflict in Russia and Ukraine, at the beginning of 2022, the prices of crude oil rose again and again, the rocket effect, quickly transferred them to those of gasoline and diesel. Thus, both reached almost €2 per liter.
  • In March, with the arrival of a possible agreement between the two countries, crude oil prices fell in international markets. Meanwhile, the impact on the final product was long in coming and thanks to the boom effect, prices fell, but very slowly.

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