Gasoline Price Changes - Federal Trade Commission

Percentage of Customers Lost to 1% Price
Increase
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
THE DYNAMIC OF SUPPLY, DEMAND, AND COMPETITION
Figure 5.2: Barron, Umbeck and Waddell
Estimates of the Effect of Local Competition
Low-Density Station Medium-Density Station
(Fewer than 19 stations (19 to 26 stations within
within 2 miles)
2 miles)
Source: Barron, Umbeck and Waddell
Station Type
High-Density Station
(27 or more stations
within 2 miles)
All else equal, stations that face greater lost sales from increasing prices will likely have
lower retail prices than other stations that lose fewer sales from increasing prices. This result
suggests that, all else equal, (1) retail gasoline prices tend, in part, to be dependent on the extent
of retail competition; and (2) when the number of sellers in a local gasoline market rises, the
average price for gasoline is likely to decline. 3 In a similar vein, another study suggests that
gasoline may cost more for consumers in rural areas – which perhaps offer a more limited
selection of gas stations – than for urban consumers. Rural stations often sell low volumes of
gasoline and therefore may have higher average fixed costs, requiring them to earn higher
margins on each gallon of gasoline sold to be profitable. 4
Station density will depend on cost conditions in an area. For example, the size and
density of a market will influence how many stations can operate and cover their fixed costs.
These fixed costs will depend on the cost of land and of building a station. In some markets,
factors such as these may make it harder for more competitors to enter and compete for retail
gasoline sales. The fact that there are fewer stations in these areas, however, does not
necessarily imply that such firms earn “supra-competitive” prices. Rather, they may need higher
prices to cover higher costs.
Zoning regulations may limit the number of stations in an area below what market
conditions would indicate the area could profitably sustain. For example, studies suggest that in
some areas, zoning laws, the high cost of land and labor, and other restrictions may influence
whether new retail gasoline sellers enter a market. 5 One study, looking at the San Francisco
area, noted that “gasoline station development costs – real estate and construction costs – are
about 50 percent higher in San Francisco than in Los Angeles;” 6 these high costs may tend to
limit the number of gas stations built in San Francisco. Indeed, there has been limited entry by
CHAPTER 5: STATE & LOCAL POLICIES, & VERTICAL INTEGRATION 105