From what I’ve read in the papers here, price wars among gas stations are quite common, and only end when prices have dropped so low that the gas stations are losing money on every sale(and this is the point where the prices jump back up).
Oh, there’ve been price wars that have dropped prices far, far below the breakeven point. Probably below the point where sales of soft drinks and lottery tickets make up the difference, too. Beats me why they do that.
I’m speculating here but…
IIRC certain economic models (not necessarily persuasive ones) assert that mutual monitoring assists in collusion.
Pre-internet, such monitoring was tricky in the US. In Ontario (a different province than BC), the government performs this service, via the weekly gasoline report.
OTOH, I understand that there is lots of local monitoring of US gas prices on the internet, at much greater detail, so this theory is admittedly dubious. Hey, I tried.
Here’s another one. jshore: Do gas stations in Vancouver have big convenience stores? If they don’t… I’d expect US stations to use gas as a loss-leader, thus being more likely to engage in price wars. :smack:
Still no clue.
On preview Maybe gas is a smaller share of Canadian gas station revenue than in the US.
Are Canadian gas taxes set on a percentage basis?
If so, do they face a different effect demand elasticity than US stations? How might this affect the propensity to engage in price wars?
Is there a higher or lower share of no-name gas stations in Vancouver? I understand that this “Competitive fringe” is dwindling in the US.
No-name gas stations may in practice have greater price flexibility than the big name franchises.
If a low gas price attracts foot traffic, the losses in gasoline may be offset by profits in higher margin items.
It is alleged that milk plays this role in supermarkets.
In my experience (Saskatchewan, Manitoba, Ontario, Michigan, and points between) the gas/convenience store split is much the same everywhere. Certainly the markup on the convenience store items is vastly higher than the markup on the fuel, but the volume of fuel sales in dollars is much higher. I have no idea how the profit streams would break down.
Fuel taxes in Canada include a 10¢/l federal excise tax, various provincial taxes, most of which are a fixed rate per litre, and then GST (7%) on the whole ball of wax (the bastards, taxing the taxes).
Why would a low gas price attract pedestrians? They go to whichever convenience store is most convenient. Or do you mean by foot traffic, people who stop for gas and grab a soft drink too? That I understand, and certainly that’s got to play a role in why price wars get started. I just recall some price wars in the days of my distant youth (we’re talking ~15 years ago) where the gas at the stations on one corner would end up at 1/4 of the price in the rest of town. At that rate they’ve got to be losing, regardless of how many cheesy puffs they sell. Haven’t seen that happen for a long time, though.
It’s called capitalism. If you don’t like it, stop buying gasoline from those stores that behave in this way.
–Cliffy
I always thought that gas stations had to make at least 6%(?) over their cost on every gallon of gas. This would prevent a chain station from selling at a loss to drive out the smaller local compettition.
Now, maybe that isn’t 6% per gallon but 6% on the whole of the product. Maybe one day they could drop below the 6% threshold as long as the overall sales of the inventory showed a 6% profit.
As far as the cost of gas going up faster than if goes down;
Gas station owners can only (safely) assume that gas will continue to increase in price. They have to sell their current gas at their estimated cost to replace it in the future. If they don’t then they loose out on potential profits immediately.
They can’t drop prices (as fast as crude drops) for the same reason. They aren’t guaranteed that the future prices will stay that low. In short, they quickly react when crude prices go up because they know for a fact what it will cost them more to replace their stock. They timidly react to lowering crude prices because there is no way to guarantee that they will stay low and they have stock on hand that they likely paid more for that they have to sell at the previously higher price before they can safely lower the cost.
Except for independent stations, most of the franchise locations (BP, Conoco, Mobil-Exxon, etc.) buy their gas as it is pumped, not one tanker at a time. This allows for the most flexibility in pricing, in either direction. It also insures that the dealer does not get stuck with a 10,000 gallon load that is worth 20% less than when he bought it the day before the prices dropped.
There are still stations that buy their loads a tank at a time, but they are the minority. This change was made after the last gas crisis in the early 1980’s. Dealers couldn’t write $10,000 checks three times a week to cover their gas deliveries. Remember the 4 cent discount for paying cash? That was an attempt to keep cash at the station to help cover those fuel expenses. The technology to sell gas a gallon at a time was pretty much perfected by Amoco in 1990 or so.
BTW I worked for Amoco Oil company for 10 years until BP bought us in 1998.
I will, just as soon as the Government stops artificially keeping agricultural prices high to help put the farmers.
Demand driven explanation for price change asymmetry:
Say there’s a sharp increase in prices. Say we have a motorist who ordinarily fills up at when the guage hits 1/4. Anticipating future price increases, he rushes out and fills up, even if he is above 1/2.
The added demand lowers inventories at various retail establishments, leading to faster price increases.
Ok, now say there’s a sudden drop in prices. Do motorists postpone filling their tanks in anticipation of future price declines? Maybe, but if they ordinarily fill up at 1/4, the scope for this is pretty limited. Most drivers like to keep a generous safety margin in their tank, as running out of fuel is a pretty big hassle.
Since lower prices don’t lead to such a sharp (short run) change in demand, we have an asymmetric price response by retailers: price increases occur faster than decreases.
What sort of explanation holds, in what proportion, is an empirical question.