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Interesting point on why gas prices rise quickly... - Elf M. Sternberg
Interesting point on why gas prices rise quickly...
Imagine that you own a storage tank full of gasoline that is currently worth $2 a gallon at wholesale prices. It is widely believed, however, that the price of gasoline will be $2.10 next week. You would be crazy to sell your gasoline now: just wait a few days and the higher price will be yours. But if everyone waits a few days, there is no gasoline to be sold now and the resulting shortage pushes the price of gasoline up. How high does it have to go? The answer is $2.10 a gallon. That is the price necessary to induce those who have gasoline to sell it now rather than to wait till next week.

This argument does not depend on whether you think the gasoline market is a paragon of perfect competition or an evil oligopoly. All it requires is that you believe that people who own gasoline, like just about everybody with something to sell, prefer to receive a higher price rather than a lower price. Even if the price of gasoline were set by a perfectly benevolent conservationist, we would expect to see the same pattern of price movements
The Rapidly Changing Signs at the Gas Station Show Markets at Work

[Edit: It occurs to me that Varian is wrong in his second paragraph: it is not true that people prefer to receive a higher price than a lower price per unit sold. What entrepeneurs are trying to hit is that sweet spot where the price X unit brings the greatest margin of operation. If Varian were correct, the price would never come down.]

Unfortunately, Varian's article doesn't address the counterpoint: why do gasoline prices fall so slowly? Gasoline prices at the pump are a combination of three factors: the wholesale price of gasoline, plus the minimum markup needed to sustain the business, plus whatever the seller can get out of the buyer. Having discovered that they can sell gasoline for $2.10 a gallon, why should the price come down? Because the neighboring station, in the hopes of increasing his profit, lowers the price a penny: there's then a slow race to eliminate the third factor of the price differential, both of them hating the other for it.

I'm not sure I buy Von Mises's assertion that even if we allowed the gas sellers to cartelize on setting a price, there would be cheating that would still force the slow race to the bottom. The premise of this assertion is that if a dozen sellers set the price at $2.10, and one cheats and sets it at $2.08 the rest would have to drop to that price or suffer a customer differential, and all that's necessary to ensure that the cartel is ineffective is to prevent the 11 cartel members from somehow influencing the cheater with initiatory violence.

Current Mood: thoughtful thoughtful
Current Music: Boney M, Rasputin

3 comments or Leave a comment
From: (Anonymous) Date: August 28th, 2006 07:40 pm (UTC) (Link)

Gas Prices

In my state there is a mandated minimum mark-up on gas, so that mark-up plus the wholesale is the lowest possible price for gas.

I have a friend who owns several mini-mart/gas stations, he says he mostly breaks even on gas sales, and make his money on the softdrinks and other stuff he sells in the mini-mart.

In fact recently he had to go to pre-pay because of drive-aways, and business is down because people are sticking their credit cards in the pump and not even coming into the mini-mart to buy anything.
(Deleted comment)
fallenpegasus From: fallenpegasus Date: August 28th, 2006 09:24 pm (UTC) (Link)

Re: Gas Prices

So what's fundamentally wrong with someone other than the store owner making the money on gas. Presumably the store owner knew how the money flows worked before he got into the business in the first place.
fallenpegasus From: fallenpegasus Date: August 28th, 2006 09:22 pm (UTC) (Link)
The last clause of your last sentence is the reason why cartels love getting government recognition (usually with the aid of progressively minded Useful Idiots). Because then they can capture the cartel regulator, and then use government cops and courts to enforce the monopoly price.

The two canonical examples in semi-recent US history were the Civil Aviation Board (which enforced cartel pricing of airplane tickets), and the Interstate Commerce Commission (which regulated the price of shipping via rail, road, and port). Both of which were killed by the Regean administration, two of the couple of dozen truely good things his administration did, but only after literally a hundred years of sucking about a trillion dollars (no exaggeration) of productive value out of the US economy.
3 comments or Leave a comment