An Easy Introduction to Gasoline Prices

Michael Giberson

The Consumerist seeks to answer the recurring question, “Why Is Gas So Freakin’ Expensive?” We could quibble with bits and pieces of the story they offer, but overall it is a solid introduction to the economics of gasoline prices. Easy enough for an interested high-schooler, or perhaps a conversation starter for your freshman economics class.

The Consumerist offers up a counter-intuitive twist that suggests politicians have it all wrong if they want to look for price gouging when prices are rising:

Despite popular misconceptions, price gouging almost never occurs as prices rise. Instead, price gouging occurs when dealers keep prices artificially high in order to gain a little extra profit or recoup costs, even though the [wholesale gasoline] price has declined.

Actually, as long time KP readers know, dealer margins do tend to improve when prices are dropping. In an October 2005 posting I quoted from an Associated Press story (story no longer online):

When pump prices skyrocketed after Hurricane Katrina, gasoline retailers were caught in an uncomfortable paradox — they were accused of gouging at the same time their profits were being squeezed by runaway costs at the wholesale level.

Now the reverse is true. The outrage from consumers and Congress has died down just as gas stations around the country are reaping some of their best returns at the pump in years by passing along huge savings at the wholesale level as slowly as possible.

The problem isn’t that the dealer suddenly decides to “gain a little extra profit” or “recoup costs” — after all, dealers are almost always trying to cover costs and find extra profit. Instead, consumers are to blame. As I wrote back in October 2005, with links to the relevant research: “When retail gasoline prices are rising, consumers search harder for the best price; when prices are falling, consumers ease up on search.”

(Consumerist link found via Freakonomics.)


2 thoughts on “An Easy Introduction to Gasoline Prices

  1. Mike,

    “Instead, price gouging occurs when dealers keep prices artificially high in order to gain a little extra profit or recoup costs, even though the [wholesale gasoline] price has declined.”

    “Gouging”, however defined, is hardly consistent with gaining “a little extra profit”, no less trying to “recoup costs” not recovered when prices were rising.

    I am still waiting for the economists’ DEFINITION of price gouging. In fact, I am still waiting for the politicians’ DEFINITION of price gouging.

    The closest thing I can think of to my understanding of what would constitute “price gouging” is the price the US federal government charges to provide the services enumerated for it in the Constitution. One might also argue that the provision of federal government services is a classic case of “bundling” far more egregious than including Internet Explorer in Windows.

  2. Mike,

    “Instead, price gouging occurs when dealers keep prices artificially high in order to gain a little extra profit or recoup costs, even though the [wholesale gasoline] price has declined.”

    “Gouging”, however defined, is hardly consistent with gaining “a little extra profit”, no less trying to “recoup costs” not recovered when prices were rising.

    I am still waiting for the economists’ DEFINITION of price gouging. In fact, I am still waiting for the politicians’ DEFINITION of price gouging.

    The closest thing I can think of to my understanding of what would constitute “price gouging” is the price the US federal government charges to provide the services enumerated for it in the Constitution. One might also argue that the provision of federal government services is a classic case of “bundling” far more egregious than including Internet Explorer in Windows.

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