Why do gas stations have a fraction of a cent added to every gallon?
In: Economics
Gas stations have a fraction of a cent on their price per gallon because it helps them advertise a price that looks cheaper.
For example, if the price is $3.99 and 9/10 cents, it looks closer to $3.99 than to $4.00. This small difference can make the price seem lower, even though it’s almost $4.00.
It’s a marketing trick to attract more customers.
In the United States, the fraction of a cent per gallon is always 9/10 of 1 cent, and the cents digit often ends in 9. This is due to a belief among marketers that a price like $3.59 9/10 is actually perceived psychologically by consumers as $3.59 instead of nearly exactly $3.60.
Back when gasoline prices were cheap, like 30 cents per gallon, it made sense to calculate the total based on fractional cents. Nowadays with gasoline prices 10X that much, there’s really no need, particularly because all filling stations round their prices up by 9/10 of 1 cent anyway, so all prices are still in exactly 1 cent increments with 0.001 subtracted from the final price.
I observed during a recent trip to Japan that they don’t round their prices this way. It seems as if the station simply adds a fixed profit margin to whatever price they pay for the gasoline, and it comes out to some price like 175.80 yen per liter. I didn’t see anything ending in “9”.
Because of tax. Currently there is a US tax of 18.4 cents per gallon used for road maintenance. There are likely other taxes added to that.
First Google result “The practice of tacking 9/10 of a cent on the end of a gas price goes back to when gas cost only pennies per gallon and was a tax imposed by state and federal governments”
It’s the same reason that cars cost $19,999 instead of $20,000, or a Big Mac meal costs $9.29 instead of $9.30, etc. The perception of of seeing those earlier, more significant digits in the price being lower is that the overall price is actually meaningfully lower.
[removed]
The real question is where is the fractional cent going? I have never walked into a gas station and had them tell me I owe $18.43 and 3/10ths a cent. Are they just rounding up the fraction and pocketing the extra for every time a person in the U.S. buys gas?
The tenths are taxes. Federal tax on gasoline is $0.184 per gallon. States usually have another tax that adds another $0.005 +. That’s where you get the 9/10.
Taxes used to have fractions of a cent.
https://www.convenience.org/Topics/Fuels/Why-Gas-Is-Priced-Using-Fractions-of-a-Penny
Can anyone explain how pricing is set? Is that done by a central office or does every station have to figure it out in their own?
Fun fact: The proper way to read out, say, $3.74 9/10, is “Three dollars seventy-four cents and nine mills.”
Latest Answers