The Gas Station Argument: Why Direct Competition Leads To Different Prices
Fields. Rural towns. Big cities. Different gas stations charge different prices. This is a simple principle in economics. Price elasticity of demand. To Calculate elasticity of demand, we divide the % change in quantity by the % change in price. Highly elastic demand (a big quantity response to a price change) suggests there are overflowing obtainable alternatives. If the price of one brand of pencil soars, we’ll all just buy other writing implements and no one’s much worse off. Inelastic demand means that consumers have few good alternatives in the face of a price increase, but to continue buying as they had before.
The type of petrol station
One thing to note is that stations that might be across the street from each other could pay vastly different amounts for the fuel they sell. There is a difference between a branded station and an unbranded station. A branded station will order their gas from their corporate parent — a Chevron station, for instance, will get their gas from the Chevron rack at their local fuel terminal.
An unbranded/independent station has a much wider range of fuel they can buy, and usually get quotes from multiple fuel marketing companies (sometimes called “jobbers”.) The station will buy the fuel from the marketer, who transports the fuel from the rack (or their storage) to the station. The price the station pays includes freight charges and other fees the marketer can charge.
Sometimes, an unbranded station might have to pay more for the fuel they sell. It also works out that an unbranded station might be able to play the spot fuel market and take advantage of oversupply and pay less than their branded counterparts.
In addition to the commodity cost of the fuel they buy, underlying infrastructure costs, credit card processing fees and factors like whether the station has a convenience store can affect the price they charge. (Since the station can make a higher margin if you come inside and buy products, they can sometimes offer their fuel for a discount and make less margin on that.)
There are sharp differences in elasticities across nations. In the short run, demand for petrol in America is almost perfectly inelastic. Demand responses in Europe in the short run are far more substantial. Consumption response grows over time. Oil prices have increased steadily for most of the decade now, and the current spike is about a year old. No surprise, then, that petrol purchases are falling, even in automobile dependent America.
If a petrol station is close to another one then there is greater competition between those outlets than an isolated forecourt.
- Motorway fuel stations are considerably more expensive because of their convenience and most are open 24 hours a day.
- Some petrol stations in the UK are run as franchises which mean that although they may carry the brand name of a big oil company they may operate independently and be owned by individuals rather than the company themselves.
- This means that individual forecourt managers are free to set their own prices.
Different areas and different prices.
Prices are usually higher in rural areas where there are less competition and fewer customers. Petrol stations in those areas are also more likely to be run by smaller, independent retailers, who have to charge more to cover business costs.The cheapest prices are found in major cities, where petrol stations have to compete for customers. They are also more likely to be run by big companies — like supermarkets — who can offer more competitive rates.
Supermarkets use motor fuel to promote the rest of their business, so they hide the cost in other goods they sell. Local services are often seen as not being as cheap as supermarkets, but people don’t do all the sums. In rural areas, fewer people means there will be fewer sales, whereas in urban areas more people mean more sales. It is supply and demand.
Catalyst, an analyst which collects information on the retail petrol market in Western Europe, agrees that supermarkets drive competition in cities and keep prices lower than other areas.
Supply and demand
An oversupply occurs when there is more oil on the market than people are consuming.
This lowers the price of oil and often those savings are passed on to motorists at the browser.
NRMA spokesman Peter Khoury said the latest dip in Australian petrol prices was down to a combination of international conditions including an oversupply of oil from the United States and Saudi Arabia.
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This piece was originally published on Globalmillennial.org