Wednesday, May 03, 2006

Competition among gas stations is not like it was

I am old enough to remember adding just over five gallons of gasoline to Dad’s car after an evening of cruising the streets of my hometown. It was 18.9 cents a gallon at the new, cut-rate station, 20.9 at all the others. Dad was unaware of how far I drove, since the car's odometer had long ceased to function. It cost me one dollar to disguise my cruising. Some nights I added only fifty cents worth, two gallons and a dribble.

When the cut-rate station opened, jokes and urban legends began circulating. A friend knew someone who had a friend who filled up at the new station, and his car stalled before he drove it a mile. People claimed cars using the cheaper gas were towed in for repairs, and the owners discovered the carburetors were hopelessly gummed up. One joke: “Name two cars that start with ‘P.’ Answer: “Pontiac, and any car that uses the cut-rate gas.”

But the station did big business, and the owner thrived and became a civic leader and a city councilman. That all began in the 1950s.

Back then, there were “gas wars.” Station managers seeing that the cut-rate business was cutting into their own businesses lowered their prices to 18.9 cents a gallon to compete. The cut-rate station immediately lowered its price to 16.9 cents a gallon. Other stations followed suit, and for a few days or a week or two, prices fell as competition kept drivers adding inexpensive gas to top off their tanks every day or so. I remember that for one brief day, gas was sold for ten cents a gallon at a competing station. After each round of competition, prices returned to 18.9 and 20.9 cents a gallon until the next “gas war.”

Competition is one of the basic laws of economics we used to have in America. But it no longer exists among filling station owners. It wasn’t so long ago, really, that gas was approaching one dollar a gallon in the nation. I remember the televised newscast that showed the first station to raise the price that high. At least the first in the city where the filming took place. The dollar gas was advertised on a huge sign at a corner station, and on the opposite corner stood a station with gas advertised at ninety some cents a gallon.

What amazed me then, and now, is that there were cars at the pumps where gas was a dollar! I had thought that the station would have sold not a drop, with cheaper gas right across the street. What happened to the economic law of competition? At that moment, it seemed to change.

I now live in the sixth largest metropolitan area of the country. Gasoline prices vary considerably all over town. Why? If it is because some stations lower their prices to attract customers, then why don’t those stations do so much more business that the others will lower their prices to compete?

I recently saw a station manager raise the price to over three dollars a gallon. Stations on two of the other three corners advertised it for less. Did the high priced station stop doing business? Not at all. Motorists lined up in the usual numbers to pump the $3 gas. The other stations followed with gas above three dollars within a day or two.

It is easy to be a curmudgeon and cynically observe that it seems to be a case of individual stations gouging the public for as much as their customers will pay. Perhaps station managers now compete to see who can get away with the highest prices, not to see who can compete for the most business by lowering prices. If that isn't the case, then explain why stations in the most affluent suburb sell gas for ten cents more a gallon, on average, than stations in the least affluent suburb of this same metropolis. They are all, undoubtedly, served by the same tank trucks and suppliers.

Perhaps motorists are, on average, too affluent to care about competition and gas "only" two cents or a dime a gallon cheaper across the street from where they usually buy fuel. I don’t know how else to explain it. But if the old laws of economics worked, stations that raised their prices first would cease selling gas, and those with cheaper prices would notice an immediate increase in customers.

7 Comments:

Anonymous Anonymous said...

That isn't the only "law" that is no longer in effect these days! Interesting post. I must be younger than you, because it cost me a lot more to top off the tank of my dad's car to disguise my miles. Some things don't change.

5/03/2006 2:03 PM  
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5/04/2006 10:07 PM  
Anonymous Anonymous said...

Where would we be today if Jimmy Carter had ordered the development of alternative sources of energy and higher gas mileage in 1973 at the time of that now nearly forgotten oil embargo by the Arabs? THIRTY-THREE YEARS OF DEVELOPMENT WOULD SURELY HAVE US FREE OF ARAB OIL, WOULDNT IT? Or Reagan. Where was he? And GHW Bush. Why didn't he order new sources, etc.? And Clinton? What if W had done so when he took office five plus years ago? If any of them had gone against the wishes of their big oil industry supporters, we'd be better off today. Instead, it is only the oil industry that is better off. Maybe we have to throw all the incumbents out!

5/06/2006 11:27 PM  
Anonymous gen said...

I was not surprised at your admission to topping off the gas on Dad's car. I think he knew it too. Anyway I am also appaled at people still buying the highest prisce gas. there still seems to be the mindset that the cheaper gas is inferior. Here the people are wondering why the gas in Bellingham which is closer to refineries in our state is higher than that in Seattle. They tend to blame the Canadians who come across the border to fill up because it is still cheaper in US than in Canada.
Another thought to consider, How many people use bottled water rather than turning on the tap or keeping a jug in the refrigerator from the tap water. How much is bottled water a gallon?

5/08/2006 9:40 AM  
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