I was filling up gasoline yesterday and the ATM/Credit Card machine at the pump asked me for my zip-code. This is not the first time it asked for it. I’ve always filled it up as part of my regular routine without thinking too much about it. For some reason, probably due to lack of things to brood about, I started thinking about the variations in pricing in gas-stations as we go from one to another. It is strange that, even the same branded gas station in an area have different prices.
How is gasoline priced ? (I am consciously not using the word ‘gas’ to keep people in the same page than deviating their minds to more effusive counterparts) Consider 3 gas stations in a area approximately 0.5 mile apart. If you are not very price sensitive, you may not care which gas station you are going to choose. Also, if you happened to be in an area which you are not familiar with, you probably wouldnt take a chance to find the lowest priced gas station. However, for a gas station owner, eventhough there is a constant demand for his product, he really would like to know the prices of the other two gas stations in his vicinity inorder to maximize his profit.
Proximity to a freeway exit, shopping mall/complex, etc., might influence the pricing decision. All it comes down to is to bet on the laziness/psychology of people and price it high enough. But, the problem is not as simple as that. Since the parent companies know all about these tricks, they zone different places and price differently based on where a gas-station is located. Anyway, we shall restrict the scope of this problem to just the final price to consumer. For people who live near the vicinity, since they are going to know about the price savings at the other gas stations, eventually they will start switching. At this juncture, it is clear that, all the pricing decisions in a given gas station depends on the mix of people who visit it. If you enter the zip-code, the gas station owner can judge how his revenue is distributed across the different and price accordingly. If a gas station has been visited by a lot of local folks, it would make sense to price a little lower than the nearby gas stations. Also, if you decrease the price considerably, you can see the impact of attracting far-off customers or lack there of. Interesting thing about this whole thing is, prices at gas-station have very very high sensitivity. Irrespective of a 1 or 2 cents difference, people switch between gas stations.
On an orthogonal note, most states have a law that mandates that the price at the pump should be atleast 8% marked up. This is to avoid big guys like Walmart who recently attempted to slash down the prices to attract more customers. It is interesting however that the parent oil companies have a 41% markup on an average. Who owns and benefits from these oil companies is another subject of discussion…So, the gas station owners are not really the culprits for increased gasoline prices.
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