Why Do Gas Station Prices Constantly Change? Blame the Algorithm(wsj.com)
wsj.com
Why Do Gas Station Prices Constantly Change? Blame the Algorithm
https://www.wsj.com/articles/why-do-gas-station-prices-constantly-change-blame-the-algorithm-1494262674
56 comments
you say "gouge" I say "increase supply to meet demand".
during/after Hurricane Katrina a couple of guys spent tens of thousands of dollars ~$500 electric generators. Rented a truck and drove a long distance to NOLA where they started selling the generators for $3000. They had willing customers, but the police arrested them for "price gouging" and confiscated the generators. Instead of having the option of paying for something that people desperately needed, emotional politicians passed a law ENSURING that people don't bust their ass to bring goods to market. How sad. EVERYONE is worse off in that situation. EVERYONE could have been better off.
during/after Hurricane Katrina a couple of guys spent tens of thousands of dollars ~$500 electric generators. Rented a truck and drove a long distance to NOLA where they started selling the generators for $3000. They had willing customers, but the police arrested them for "price gouging" and confiscated the generators. Instead of having the option of paying for something that people desperately needed, emotional politicians passed a law ENSURING that people don't bust their ass to bring goods to market. How sad. EVERYONE is worse off in that situation. EVERYONE could have been better off.
There's no supply issue. We're talking about adding small marginal cost to transactions between 4-7 PM on Friday and 6-9AM Monday. They don't price it too high, because shifting demand would actually cost them some revenue on the higher margin convenience business.
I bet the model here is that the oil company owns the gas and the retailer sells it on consignment. The oil guys control the price and care about making investments to chisel pennies, as they have hundreds of gas stations. They can't steal too many pennies though, or the coffee and hotdog business inside will falter.
Re: your disaster profiteer use case, I have little sympathy. I'm sure those guys were doing things like collecting Lousiana sales tax, etc that everyone else was going to do.
I bet the model here is that the oil company owns the gas and the retailer sells it on consignment. The oil guys control the price and care about making investments to chisel pennies, as they have hundreds of gas stations. They can't steal too many pennies though, or the coffee and hotdog business inside will falter.
Re: your disaster profiteer use case, I have little sympathy. I'm sure those guys were doing things like collecting Lousiana sales tax, etc that everyone else was going to do.
>There's no supply issue.
Oh, but there is! FTA:
>"One client called to complain the software was malfunctioning. A competitor across the street had slashed prices in a promotion, but the algorithm responded by raising prices. There wasn’t a bug. Instead, the software was monitoring the real-time data and saw an influx of customers, presumably because of the long wait across the street."
Maybe the only way this gas station can stay in business (add supply) is to charge congestion premiums.
Oh, but there is! FTA:
>"One client called to complain the software was malfunctioning. A competitor across the street had slashed prices in a promotion, but the algorithm responded by raising prices. There wasn’t a bug. Instead, the software was monitoring the real-time data and saw an influx of customers, presumably because of the long wait across the street."
Maybe the only way this gas station can stay in business (add supply) is to charge congestion premiums.
How do you identify a situation like this where people might have been helped by the "price gouging" vs something like a company running a festival where they don't allow water to be brought in and you can only buy it from approved vendors who increase the price massively? If there's going to be error one one side or the other, I'd prefer it to be on the side that doesn't incentivize company's to do things that hurt people.
There was nothing stopping other people from buying generators and going down. It's the possibility of competition that's important in my mind. I've come to the conclusion that nothing protects consumers as much as competition
ISP's have a possibility of competition but they don't. The possibility of something happening can not be the end all for legislation
See https://en.wikipedia.org/wiki/Natural_monopoly. ISPs are in an objectively different situation from gas stations and the supply of generators over a distance in a disaster situation.
The thing with gas stations is, the gas has to come from somewhere. For various reasons, oil companies are in a natural-monopoly position (or rather, a natural cartel position, that uses various branding tactics to discourage the appearance of collusion—much like the deBeers cartel does for diamonds.)
With so much leverage over their direct customers, the oil cartel isn't interested in allowing gas stations to eat into their profit margin. So they buy them. Thus, gas stations become another facet of the cartel.
With so much leverage over their direct customers, the oil cartel isn't interested in allowing gas stations to eat into their profit margin. So they buy them. Thus, gas stations become another facet of the cartel.
I dont think that ISPs have a realistic possibility of competition. There are lots of barriers to entry to start an ISP and the current ISPs could probably just price you out of existence in whatever market you tried to enter anyway
There absolutely is.
Until the phone companies decided to get out of the business of supplying landlines, there was a competitive market for both dialup and DSL service in the US. In my area, I used to buy EarthLink cable service because they offered higher upload speeds.
In the UK, many people can choose one of a dozen ISPs.
That's the real reasoning behind Ajit Pai and his pals in the industry hatred of the Title II regulatory classification of internet access. They want to head off local loop unbundling (which requires companies to share local infrastructure at non-discriminatory rates) and ultimately re-create the old Bell Telephone monopoly.
Companies like Verizon and Comcast are incredibly inefficient and poorly administered organizations. If meaningful competition were possible, they would be slaughtered in the marketplace.
Until the phone companies decided to get out of the business of supplying landlines, there was a competitive market for both dialup and DSL service in the US. In my area, I used to buy EarthLink cable service because they offered higher upload speeds.
In the UK, many people can choose one of a dozen ISPs.
That's the real reasoning behind Ajit Pai and his pals in the industry hatred of the Title II regulatory classification of internet access. They want to head off local loop unbundling (which requires companies to share local infrastructure at non-discriminatory rates) and ultimately re-create the old Bell Telephone monopoly.
Companies like Verizon and Comcast are incredibly inefficient and poorly administered organizations. If meaningful competition were possible, they would be slaughtered in the marketplace.
I think it's quite easy to identify if in a given situation it is possible for an enterprising competitor to appear, or if there is some artificial distortion that prevents such competition from appearing such as in your example.
In your example, the real problem isn't that they're charging artificially high prices for water; it's that they're not allowing water to be brought in and then surprising attendees with high prices.
If you want to fix that problem, fix it there. You could either require people to be allowed to bring water in (for obvious public health reasons, for example), or require the event organisers to prominently include the price of water in any advertising that includes the event ticket price, or require them to provide free water (again for public health reasons) and include the cost of supplying that in the ticket price.
In your example, the real problem isn't that they're charging artificially high prices for water; it's that they're not allowing water to be brought in and then surprising attendees with high prices.
If you want to fix that problem, fix it there. You could either require people to be allowed to bring water in (for obvious public health reasons, for example), or require the event organisers to prominently include the price of water in any advertising that includes the event ticket price, or require them to provide free water (again for public health reasons) and include the cost of supplying that in the ticket price.
In the specific case of raising prices, I'd argue that it's decreasing demand to insure sufficient supply. I agree, thought, that it's a good thing.
it's not a good thing, but it is a necessary thing... meant to make consumers think hard about efficient use of a limited resource. you'd probably be as careful as possible with gas if it were $20 per gallon, and rationing gas is going to help everyone who needs gas.
In the traditional case of actual stores the increase in price does not associate with an increase in supply.
Gas stations seem pretty inflexible in how much they can supply to market through their pumps. Increasing prices has more to do with making the quantity demanded and quantity supplied equal. When the supply quantity isn't flexible, it's demand that must change, and that's very easily accomplished by a change in prices.
At least, that's the theory :-)
At least, that's the theory :-)
Buddy ran a gas station in the cities for a while and within reason and the law (MN has some rules), he would mostly change his price based on the price of a station near him. That generally went with the price he should be charging based on what they were buying it for. I sometime think he just thought price wars were fun. I guess having an electronic price sign tends to embolden you when your competitor still has to flip it manually.
The reservation gas station prices theirs at $0.05 lower than the next town overs gas. They all pretty much buy it at the same price and the profit is on the inside of the store not the gas pump.
The reservation gas station prices theirs at $0.05 lower than the next town overs gas. They all pretty much buy it at the same price and the profit is on the inside of the store not the gas pump.
A friend of mine bought a gas station franchise for a major oil company (in a very large city, I might add), and he'd basically do the same. His price intelligence system is pretty low tech - it involves him hopping in a car and seeing what his local competitors are charging.
I used to work at a Wawa gas station where the manager would occasionally send someone out to check the station down the street and make sure we were still undercutting them by a few cents. I assumed that was pretty standard in the industry.
Which is funny to me, because Wawa has a few, very effective means of ensuring customer loyalty.
Between state-minimum priced cigarettes (for smokers), fee-less ATMS, the awesome, cheap coffee bar, and pretty darn reasonable rates on their hot, prepared food items, I usually prioritize going to Wawa in every circumstance possible, even if gas prices aren't the absolute lowest.
I remember when I moved to the Maryland area, hearing everybody rave about what sounded like the dumbest named convenience store I'd ever heard of, and how convinced I was that I'd never fall into that cult of weirdness, but they proved to be too convenient in too many ways for me to ignore them, and now I'm a devoutly loyal Wawa customer.
Between state-minimum priced cigarettes (for smokers), fee-less ATMS, the awesome, cheap coffee bar, and pretty darn reasonable rates on their hot, prepared food items, I usually prioritize going to Wawa in every circumstance possible, even if gas prices aren't the absolute lowest.
I remember when I moved to the Maryland area, hearing everybody rave about what sounded like the dumbest named convenience store I'd ever heard of, and how convinced I was that I'd never fall into that cult of weirdness, but they proved to be too convenient in too many ways for me to ignore them, and now I'm a devoutly loyal Wawa customer.
In Florida. Absolutely love Wawa. They're wonderful.
Funny -- being a Canadian, my first interpretation of your experience was that you worked at a gas station in Wawa, Ontario.
Had to look it up before realizing it's actually the name of a company in the US.
Had to look it up before realizing it's actually the name of a company in the US.
My mom and dad used to work at a company that owned about 100 gas stations. They had a guy who drove around all day just checking prices. And other guy who is the meat space equivalent of this algorithm.
They came up with some baseline rockbottom pricing base on how much they paid for the gas.
They'd try to price it based on competition. But you can't just price it at the competition. You have to consider other factors. If the station accross the street has a better location (easier access to the road is common, in a parking lot with other stores) then you have to be lower to get business. People will cross the street for 2 cents, but they won't for no difference.
If you have a big spread in the rock bottom and competition, it might be worth lowering to gain more business.
But you never made much money on the fuel itself. You made the profit on cigarettes, lotto, soda, and snacks. The company made more money with low gas prices. Sounds odd. But people get angry at the gas station owners when prices is high, even though they are taking at most 10 cents a gallon profit, usually way less. So they are less likely to spend money at the convenience store.
The company ended up selling all the stations off. You can't run them like a business now that most are run by families without steeply discounted labor.
My father in law did that for 10 years. Never turned a profit, ended up handing the station back to the franchisee for free rather than continuing.
It's a cutthroat business. I wouldn't want to be a part of it.
They came up with some baseline rockbottom pricing base on how much they paid for the gas.
They'd try to price it based on competition. But you can't just price it at the competition. You have to consider other factors. If the station accross the street has a better location (easier access to the road is common, in a parking lot with other stores) then you have to be lower to get business. People will cross the street for 2 cents, but they won't for no difference.
If you have a big spread in the rock bottom and competition, it might be worth lowering to gain more business.
But you never made much money on the fuel itself. You made the profit on cigarettes, lotto, soda, and snacks. The company made more money with low gas prices. Sounds odd. But people get angry at the gas station owners when prices is high, even though they are taking at most 10 cents a gallon profit, usually way less. So they are less likely to spend money at the convenience store.
The company ended up selling all the stations off. You can't run them like a business now that most are run by families without steeply discounted labor.
My father in law did that for 10 years. Never turned a profit, ended up handing the station back to the franchisee for free rather than continuing.
It's a cutthroat business. I wouldn't want to be a part of it.
I used to work at a gas station (that no longer exists) where we would get phone calls several times a day. The unidentified caller would ask what our price was, ask what the price was at the gas station across the street, and tell us what to set the price to. Basically anybody could have called that place and set the price to whatever they want (within certain limits of sanity, $0.25/gal or $30/gal probably would have prompted some additional phone calls).
Same here. We'd get a call informing us of a price change. The station I worked at typically followed the price movements of a station down the street.
I'm trying to decide whether this quote is a deep insight into efficient pricing or consultant-level cognitive dissonance and self-justification: “This is not a matter of stealing more money from your customer. It’s about making margin on people who don’t care, and giving away margin to people who do care,”
Leaning towards the latter.
Leaning towards the latter.
This sort of thing shows up in lots of different pricing mechanisms. There's no structural reason why plane or train tickets should be cheap far in advance and then go up in price a lot as the departure date nears; it's just that people who are willing to book early are going to be cost-conscious and might compare prices on multiple options while those late might care more about convenience than price (e.g., people traveling on their company's dime).
Doesn't buying plane tickets in advance let airlines plan capacity better?
They can do some capacity modulation through pricing, sure, but their historical DBs have a large enough 'n' (American Airlines SAABRE was the first big database application and drove database design) that they can predict pretty well. Which is why the bumped-due-to-overbooking is pretty low.
BTW I think it's appalling that overbooking is allowed in this age of nonrefundable tickets. You've paid for the seat; whether you sit in it is your business. In the old days of regulation most tickets were fully reusable, and overbooking harks back to that time.
BTW I think it's appalling that overbooking is allowed in this age of nonrefundable tickets. You've paid for the seat; whether you sit in it is your business. In the old days of regulation most tickets were fully reusable, and overbooking harks back to that time.
For many airlines, you can re-schedule your non-refundable ticket for another day for a fraction of the cost of the original ticket. You still have to fly on that airline at some point to recoup any of the value of the ticket, but it can be done.
I can't reply to my sibling post https://news.ycombinator.com/item?id=14301909 , where this comment probably belongs, but I hoped I might be allowed to clarify that my badly worded response was not meant to be meaningless snark. What I meant to say in response to
> Doesn't buying plane tickets in advance let airlines plan capacity better?
was that whatever airlines are doing to plan their capacity doesn't seem to work very well. In support of this vague claim I adduced a news incident, very very snarkily (for which I apologise), but honestly in a spirit of discourse rather than simply of attention grabbing.
> Doesn't buying plane tickets in advance let airlines plan capacity better?
was that whatever airlines are doing to plan their capacity doesn't seem to work very well. In support of this vague claim I adduced a news incident, very very snarkily (for which I apologise), but honestly in a spirit of discourse rather than simply of attention grabbing.
There is a structural reason:
https://en.wikipedia.org/wiki/Supply_and_demand
The people setting the prices on expiring goods are gambling on where the supply and demand curves will be, and they're probably wrong so they go up and down. Next time you reserve a hotel room, check the prices right before your cancelation window expires. There's a good chance the room prices have dropped.
Edit: Also there might be some price discrimination involved. Since each buyer values goods differently, it is most optimal for sellers to charge the most each buyer is willing to pay, and it could be true that those seeking last minute flights are business travelers willing to pay more (or those with emergencies willing to pay more). Also works with grocery store coupons and discount codes, those whose time isn't worth looking for coupons won't bother.
https://en.wikipedia.org/wiki/Supply_and_demand
The people setting the prices on expiring goods are gambling on where the supply and demand curves will be, and they're probably wrong so they go up and down. Next time you reserve a hotel room, check the prices right before your cancelation window expires. There's a good chance the room prices have dropped.
Edit: Also there might be some price discrimination involved. Since each buyer values goods differently, it is most optimal for sellers to charge the most each buyer is willing to pay, and it could be true that those seeking last minute flights are business travelers willing to pay more (or those with emergencies willing to pay more). Also works with grocery store coupons and discount codes, those whose time isn't worth looking for coupons won't bother.
The quote is a good way to summarize what economists call "price discrimination" or "differential pricing." I think the practice generally results in a lower price for the people who "do care" than what they would have gotten with no price differences, because they end up getting a below average price. Although my understanding of that is sketchy.
I think it depends a little on how you define "do care". I think people are concerned that prices will rise to an extent they will care about, but that they are still willing to pay, i.e. demand is not very elastic.
E.g. if your tank is empty, you're willing to pay an exorbitant price, but you certainly won't be happy about it.
So, I think it depends a little on the actual implementation. If this really is about giving people who are very price sensitive a discount I don't think people will mind a lot, but if these algorithms learn to gouge people who are in a predicament, they won't be happy.
E.g. if your tank is empty, you're willing to pay an exorbitant price, but you certainly won't be happy about it.
So, I think it depends a little on the actual implementation. If this really is about giving people who are very price sensitive a discount I don't think people will mind a lot, but if these algorithms learn to gouge people who are in a predicament, they won't be happy.
If you're price sensitive then you don't wait until your tank is near empty and fill up when the price may be high. You try and plan ahead a little and fill when prices are at a lower point than average.
Me? When I hit a quarter tank I go fill up. It's a fuel hungry sports sedan that runs on premium, I resigned myself to the fuel expenses before I even purchased the car. I honestly don't even look at the prices because it's just really not worth the time to worry about for me.
Me? When I hit a quarter tank I go fill up. It's a fuel hungry sports sedan that runs on premium, I resigned myself to the fuel expenses before I even purchased the car. I honestly don't even look at the prices because it's just really not worth the time to worry about for me.
It's the doublespeak justification for it - "we're helping people by maximizing our profits" - that gets me.
Airplanes not being the best example, since they control the entirety of the supply chain, but if they were more like arena ticket sales, or sports-team ticket sales, then they actually would be helping people by maximizing their profits.
In the case of musicians, most of them undersupply and underprice their tickets, which means that there's a market for reselling. For a variety of reasons, they keep prices low so as to ensure a sold out venue as best they're capable, and when prices are lower than they ought to be, ensures a market for resellers. Resellers help offload the risk to the original sellers, but if the sellers were capable of maximizing profits in the first place, buyers would benefit by not having to deal with the perils associated with gray market sales. Also, the artists / venue / middlemen would make more money.
http://www.aei.org/publication/ticket-scalping-as-an-efficie...
In the case of musicians, most of them undersupply and underprice their tickets, which means that there's a market for reselling. For a variety of reasons, they keep prices low so as to ensure a sold out venue as best they're capable, and when prices are lower than they ought to be, ensures a market for resellers. Resellers help offload the risk to the original sellers, but if the sellers were capable of maximizing profits in the first place, buyers would benefit by not having to deal with the perils associated with gray market sales. Also, the artists / venue / middlemen would make more money.
http://www.aei.org/publication/ticket-scalping-as-an-efficie...
The quote isn't solely self-congratulatory, as this pricing mechanism occurs in other industries too. For something like fuel stations, which (on the surface) appear plentiful in highly-trafficked areas, it would naively seem that there's plenty of choice for consumers to get the product at the price point they prefer.
This is much, much more true for fuel in a populated area, than it is for other products where the alternatives are in fact not equivalent, despite being priced similar (e.g. airplane tickets for the same destination are seldom equivalent, even if there are several choices; they differ meaningfully in departure times, airports, airlines, layovers).
In reality, most people are used to constant price fluctuations in the price of products such as motor fuel and airplane tickets, much more so than they are used to fluctuations in the price of staple foods at the supermarket, so most middle-income people (and up) don't go out of their way to find a different fuel station if the price is just a little bit higher, as both the cognitive effort of pondering to switch, and the physical effort of performing the switch often outweighs the savings.
For very price-sensitive people, they are (predictably) screwed by this, as they have to run around more, or come armed with more data (price apps) or expend effort on discounts (coupons, driving to the cheapest location, holding off on purchases in the hope that the price drops) to save money.
This is much, much more true for fuel in a populated area, than it is for other products where the alternatives are in fact not equivalent, despite being priced similar (e.g. airplane tickets for the same destination are seldom equivalent, even if there are several choices; they differ meaningfully in departure times, airports, airlines, layovers).
In reality, most people are used to constant price fluctuations in the price of products such as motor fuel and airplane tickets, much more so than they are used to fluctuations in the price of staple foods at the supermarket, so most middle-income people (and up) don't go out of their way to find a different fuel station if the price is just a little bit higher, as both the cognitive effort of pondering to switch, and the physical effort of performing the switch often outweighs the savings.
For very price-sensitive people, they are (predictably) screwed by this, as they have to run around more, or come armed with more data (price apps) or expend effort on discounts (coupons, driving to the cheapest location, holding off on purchases in the hope that the price drops) to save money.
Seems like an interesting article, unfortunately I can't access it, even using the Web link in a incognito tab.
Thanks! That is a really interesting article.
WSJ posts are definitely becoming more effort than they're worth
I wonder if this drives people to Costco? I've felt a major reason people pay to be a member is that if you buy all your gas there, you save in a year roughly the cost of your membership.
Unfortunately, my Costco doesn't have a gas station. It was planned, but there was a lot of opposition from the neighboring neighborhood (never mind the fact that they already border on a busy mall parking lot). Anyway, the Executive membership will also more than pay for itself with what you get back. I think you always make the extra cost back no matter what. I guess it's Costco tip day here on HN.
Data point: Costco outside my work has gas for $2.61. Across the street is a gas station selling for $2.98. In my experience I save about $4-5 per tank buying at Costco. I fill up about every two weeks, so I save about $100 per year on gas.
If you are new to Costco you will typically save nearly the full membership cost on your first trip, stocking up on basic house supplies.
If you are new to Costco you will typically save nearly the full membership cost on your first trip, stocking up on basic house supplies.
This. And it's very convenient to run in and pick up some necessities after.
It's pretty blatant when any global event impacting future oil supply results in immediately raised pump prices for gas.
I assume you want them to keep prices low until the more expensive gas actually works its way through the supply chain to them. Should they also keep prices high for that period after oil prices drop?
Isn't that what happens? Back when I owned a car, some event would be in the news that restricted oil supply and the next day the prices would have jumped up. On the inverse, when something like OPEC announcing they would increase production happened that increased the oil supply, prices would not drop for days or weeks. I'm sure that's a lot of anecdotal evidence without the full picture, but there iss no reason for them to drop the prices if the demand is still there. Its the same reason why software is more expensive in Australia when there is no increase in difficulty in distributing it there. The companies charge more because they can
I think there's some lag, but not as long as the supply chain takes. I'm not sure, it's been a couple of years since I've had to pay attention to gas prices myself.
In my area, there's been a big consolidation of gasoline retailers and distributors, so there is less competitive pressure to lower prices.
The biggest differences in price now are between people who use gas as a loss leader (wholesale clubs) and a chain that prices $0.05-0.10 more because the local supermarket subsidizes the gas.
The biggest differences in price now are between people who use gas as a loss leader (wholesale clubs) and a chain that prices $0.05-0.10 more because the local supermarket subsidizes the gas.
I am not so sure. I do not think considering the cost of replacing inventory is unreasonable.
I'd much rather blame whoever decided to rely on "the algorithm".
As a proposed legislative solution to this. Limit the resolution of prices consumers face. E.G. Only allow the price to change at 2AM daily.
Equally absurd is "blame the algorithm". While they may use some fancy machine learning, that pattern is pretty clear -- they gouge customers during peak periods, and cut the price during slack periods.
The AI component is probably there more to deflect accusations of cartel-like price fixing than any actual utility.