[derosa8]

In Professor Herbener’s lecture on prices of consumer goods part II, he mentions gas prices. He explains that because entrepreneurs are good speculators in that field, you will not see someone come in and try to sell at $2.55 a gallon, when others are selling at $4.00 a gallon. It sounded like he was saying the efficiency of the market in addition to accurate speculation prevented this wide range in prices.

However, I seem to say fairly wide ranges in gas prices when I drive around. I realize “wide ranges” are in the eye of the beholder to an extent, but when I see some states at $3.95 per gallon and others in the same town selling for $3.35 per gallon I get confused.

What might cause this disparity in prices between gas stations? Both have been in business for a while, and the one is consistently 40 to 60 cents higher than the other.

I am open to insight Professor Herbener or from anyone on this site.

[jmherbener]

Obviously, there must a reason why participants in this particular situation do not seek to exploit this difference by arbitrage or competition. Usually the reason is a particular preference people have. Buyers may perceive one station as having a superior product or buying experience. This kind of thing is common and often related to the personality of the seller or the personalities of the other customers. So trendy restaurants can sell meals at higher prices than the competition. Some Americans are loyal toward American car companies and so, their prices are higher than otherwise and, perhaps, even above technically superior foreign cars that are sold in the same market.

To apply this reasoning to big differences in gas prices in the same town, but not at stations across the street from each other, some buyers may view the location of some station as dangerous and therefore, not compete away a large price difference while the customers at the high price station don’t drive to the lower price stations out of loyalty to their neighborhood. Suppliers of gasoline don’t try to supply more at the dangerous stations because they really are dangerous and therefore, their costs are higher.

[derosa8]

Unfortunately, that danger does not seem to be a factor in the town as it is a very safe area. The one thing that could come into play is that the cheap gas station is smaller (so you often have to wait for 1 or 2 cars) as well as on more of an obscure corner, as opposed to the bigger gas station on the main road. But I still wasn’t sure that was enough of an explanation for a 40 – 60 cent difference.

Also, is it even possible for people to arbitrage gasoline like that? I suppose speculators could, but they don’t normally go to local gas stations and just start buying up their gas, right?

[jmherbener]

Economic theory doesn’t tell us the particular reason for the lack of complete arbitrage or competition, just that they are incomplete is such cases. My example only discussed competition, i.e., buyers deserting high-priced sellers and patronizing low-priced sellers. Of course, the average gasoline buyer is not going to arbitrage, i.e., buy at a low price and resell at a high price. But, suppliers of gasoline to the gas stations might be able to arbitrage it. You would have to investigate the particulars of the case to find out whether they do or do not.

[derosa8]

Ok, thanks for the response!

[Author]

Posts