Gasoline prices add 9/10 at the margin

Higher Gas Prices

by Elaine Schwartz    •    Jun 5, 2011    •    565 Views

How have we responded to higher gas prices?

According to a recent study, our first response is to buy a lower grade of gasoline. Drivers, used to premium, opted for regular gasoline instead. However, because we have different “budget baskets,” we do not initially cut our clothing purchases or what we spend on food.

We respond also by looking for lower priced gas. Using as one source of data, an Ohio State economist observed that traffic soared on the website when prices skyrocketed during 2008. When prices fell, traffic subsided. (This website lets you compute how far you can drive before the mileage offsets the savings.)

And finally, higher gas prices affect how we respond to falling prices. We tend to select a “reference price”–an amount we associate with an item. For gas, if the reference price is the elevated amount, when price starts to fall, we do not shop around as much. Seeing less pressure to lower their prices, sellers delay. As a result, gas prices rise much faster than they fall.

You can look here for more about higher gas prices.

The Economic Lesson

The “fast rise/slow fall” phenomenon for gas prices happens wherever competition is minimal. If retailers can price gasoline similarly, they are behaving like an oligopoly with some pricing power.

An Economic Question: Imagine a competition scale or continuum. To the left is perfect competition with many small firms, identical products, and no pricing power. The market controls their behavior. At the other end is monopoly where the firm has considerable pricing power, is large, and has no competition. Where would you place gasoline retailers? Why?


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