Saturday, November 10, 2007

Gas pricing

Today I was at the gas station on Westlake Drive and Democracy Blvd next to the mall. At this gas station, the Shell and the Exxon are right next to each other. Price for regular at the Shell was $2.99 while at the Exxon, it was $3.09. As expected, the line for the pumps at the Shell were snaking out to the mall road while there was virtually no one at the Exxon. This is as close to perfect imformation as you can get. Economists like to use gas stations as an example of say oligopoly pricing behavior or to over exaggerate the ability of gas station owner to set prices at the pump as in here (perpetuated by Prof. Mankiw). I used to believe this kind of stuff (the model of oligopoly pricing as well as the kind of stories told in the above link) and actually thought that they were very neat.

These days, I no longer believe that gas stations are a good example of oligopoly pricing, nor the kind of behavior in the Mankiw post. The change is mainly due to the what I've read about zone pricing. When I worked as a research assistant a long time ago, I had the opportunity to examine the financial statements of a gas station owner and discovered that cost of goods to the owner was incredibly high. (I forget what this number was but usually, COGS are around 60% and I think in the case of the gas station owner it was around the 90% region).

In short, armchair economics is fun. However, using gas stations as examples of monopolistic pricing and the story in the Mankiw post are examples of armchair economics that can lead to wrong policy prescriptions. As a footnote, I am unconvinced about the existence of price gouging; I just don't think that the story that was posted by Mankiw is a good rebuttal of price gouging.

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