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Rational Gus Guzzling

By Chris | April 26, 2008

It infuriates me when Congress calls on the CEO’s of oil companies to justify their profits. Economists routinely study gasoline prices and find no evidence of price manipulation. Washington State recently commissioned a report on gas prices (HT Knowledge Problem:

The report, written by University of Washington economist and petroleum expert Keith Leffler, didn’t find gas gouging or other illegal conduct. It attributed the differences to local competition and the cost of obtaining and transporting fuel to stations.

Leffler said the differences are because of wholesale costs, the cost of transporting gas from the terminals to retail stations, land costs, density of gas stations in a given city and the presence of chain gas retailers such as Costco and Wal-Mart.

“The data supports what we’d expect to see in a competitive marketplace,” McKenna said. He added that unlike energy and utilities, gasoline is not regulated.

This finding has been replicated in other studies as well. In a fascinating study, John M. Barrona, John R. Umbeckb and Glen R. Waddell were given permission from a major gasoline retailer to change the price at the 54 gas stations by +/- 2 cents. By inserting exogenous price changes into a real market setting the authors were able to study the reactions of rival stations and consumers. The authors’ findings support:

… that an increase in the number of rivals increases the price elasticity of demand of an individual seller and that the reaction of rivals to an exogenous price change by one seller in the market will decrease with an increase in the number of rivals.

Different physical locations and perceived differences in gas quality prevent the gasoline market from being perfectly competitive. However, the market for gasoline follows standard economic theory. Consumers are more price sensitive when there are more gas stations competing for their business and the pricing power of a gas stations decreases rapidly as competitors enter the market.

Not surprisingly, consumers in my native Pacific Northwest are responding to escalating gasoline prices. The Sightline Institute recently reported that residents of Idaho, Washington, and Oregon:

…used on average nearly a gallon less each week in 2007 (7.8 gallons) than they did in 1999 (8.7 gallons), the lowest per-capita level since 1966.

Topics: Economics, Markets | 2 Comments »

2 Responses to “Rational Gus Guzzling”

  1. John in Canada Says:
    August 20th, 2010 at 2:04 pm

    Even though I believe in economics and hope that market were more free, we in Canada always found retal gasoline prices movements to be very odd. It was found that many gas retailers were found guitly of price fixing.

  2. Amber Floyd Says:
    July 23rd, 2011 at 11:42 pm

    Greetings awesome short post! Does any one know stores or shops @ California using text message marketing service My store is changing 2 it and I would like to make joint specials with other shops near by.