Monday, November 12, 2007

Gas pricing revisited

I posted previously about the price of regular gasoline at two gas stations: one was $2.99 and the other was $3.09. I happened to go by there again today and had expected that the gap between the two prices to have closed. Instead, it was now $2.99 and $3.14. Here is one possible story. As a gas station owner, I get charged by the distributor for gasoline (my cost of goods). The distributor does not know the pricing models of other distributors but instead behaves myopically. So I'm charged $3.07 for Monday of one week and then $3.13 again for Monday the next week. The other gas station owner also pays his distributor but at a different time of the week for instance, on Friday, so he is charged $2.89 for one week and I am thinking that it will be above $3.00 the next week. (These are all made up numbers.)

What I am observing is a lag in the switch in prices. Why doesn't the other station owner with the high gasoline price lower his price? Because he is constrained by the cost charged by his distributor. I take this as a strike against oligopolistic pricing models using gas stations as examples.

No comments: