Friday, June 14, 2013

Location looms large in pump prices at California gas stations

Article found at:

In this article, the author loosely tries to explain how the price of gas is determined, and why the price will vary from place to place. The example used in the article is in California in 2012, when Michael Denis paid $4.69/gallon and 4 miles away Lupe Alfaro only had to pay $3.89/ gallon. The difference comes, "because fuel refiners charge unequal amounts to service station dealers in separate areas based on a host of closely guarded factors, such as nearby competition, traffic volume and station amenities." The writer essentially calls gasoline pricing a conspiracy designed to hurt consumers in a way that retail stores do not. His example is that sweaters in a chain's stores will always have similar pricing.

Gas stations operate at a level approaching pure competition. The barriers to entry are low, and if they do not function at the market level, then they will not sell and they will go out of business. They are price-takers. The distributor sells to the highest bidder, depending on demand, and then the local gas stations can only put out the product at the market price. These stations might have a chain name, but they are normally independent franchises and are constrained by demand as much as the next. If consumers are willing to shop around and choose cheaper locations, then prices will have to change to accommodate. The market drives these factors, it is not some large business conspiracy that is bent on sucking extra profit out of the consumer. 

1 comment:

Larry Eubanks said...

I suggest it is not surprise that location matters. Location usually matters, but unfortunately much of economics neglects location decisions. Certainly economic discussions in undergraduate courses tend not to discuss the principles of location choices.

The fundamental conceptual idea in thinking about location is the marginal cost of transport, i.e., the cost of getting another mile from here to there. Four miles from a specific here to a specific there in Southern California usually does not have the same opportunity cost, especially when considering time spent. This of course has an impact on actual competition because it influences how closely gas stations locate with respect to each other.