Why do supply and demand not seem to apply with gas stations, with such varying prices and “that really cheap place!” phenomena?

Question

I have never, ever understood this. Gas is for the most part is a simple commodity. Sure, some prefer a premium brand (like Shell) to a cheaper one (like ARCO), but I can’t for the life of me figure out why there is such a wide variance even within a single mile or two of a city (and amongst the same brand!) I would think that supply and demand would reign supreme here. It’s the same stuff.

You get that one gas station that charges $0.10 less than all the others in the area and the lines are out to the street.

So where are supply and demand?

In: 38

Answer 1

Supply and demand is a complicated business.

Demand side:

– Yesterday’s prices affect today’s demand, and today’s affect tomorrow’s. How much business is repeat, how much is passing through? How much do people shop around vs go with what’s usually cheapest?

– Location, location, location. $1 on a tank isn’t a lot if you have to spend time getting there and back. Customers have different routes and different time sensitivities.

– Imperfect information – and getting information costs consumers (in time and gas). Sure, you can undercut your competitor, but if they don’t know about it, you don’t benefit but do lose out.

– Brand loyalty, habit, and a preference for buying gas at the same place all affect demand.

Supply side:

– They don’t just sell gas, they also sell other stuff, usually with higher margin. So they might make more money by not making any money on the gas.

– The more volume, the less they need to charge to make up the fixed costs.

– Changing prices has a cost and a time lag. Deciding whether to cut prices or not is an activity and doesn’t happen constantly.

– Current price changes affect future prices. If you cut price, will your competitor cut too? If so, you only make both of you worse off. But that makes them worse off. Maybe you can eventually make them stop undercutting you because it’s shit for both of you.

– Different costs of gas. Even if they’re paying the same wholesale price, the delivery costs companies face might be different.

– Different structures. A national entity might be setting prices regionally rather than for that single mile.

This is all part of supply and demand, and there’s going to be a ton of other reasons too.