common confusion on the market for gasoline

Some basic points of confusion about markets in general-- and the market for gasoline in particular-- from a letter to the editor of the C-J...

In the last 30 days, I have taken numerous trips out of the Louisville area of approximately 300 to 500 miles, and I'm always amazed at the fuel prices once you get 50 miles or so from Louisville.

From there, he provides details which, on the surface, appear significant. The problem with his inference is that the market for gasoline is not one uniform whole. Because of responses to EPA regulations, metro areas have additives in their gasoline, so that one gas is not like another gas. This increases the production cost of gasoline, although this is relatively modest. It also fragments the market for gasoline, increasing the degree of monopoly power that could be exerted. But the larger point: you can easily find cost differentials in such a system.


Why are we getting gouged? It seems to be predatory pricing to see how far they can go before the public starts to scream. When these retailers raise prices by as much as 20 to 34 cents, we all moan and complain to each other and pay at the pump, and over days or weeks they bring it down a penny at a time and we cheer. In today's economy, fuel for most people is a necessity not a luxury....

Really, his question is why they gouge us here (supposedly) while failing to gouge everywhere else he drives. Why do we put up with "it"? Again, the answer is probably, that we're not getting gouged. The funny thing is that if they were good at gouging, we'd never notice the difference-- since we'd pay artificially high prices everywhere and would never see the sort of differences that motivate his letter!

The other thing is that he's confusing the inelasticity of gasoline (given few close substitutes) with the elasticity of gasoline at any given gas station (given a lot of close substitutes). As a whole, we could be gouged on gas; but as individual stations, it's far less likely that they could collude and gouge us all together.