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I've noticed there can be a 5%-10% difference in the price of gas where I live. For example right now the cheapest premium price is $3.85 and the most expensive is $4.17. It's the same state and county, and the product being sold is considered a commodity. I know the simple answer is "what the market with bear," but what specific factors account for this price variance?

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I used to live near 3 gas stations on 3 corners of the same intersection. Two even had the same company name. They each had different prices. They all got business. –  Jay Bazuzi Mar 6 '12 at 19:20
    
I was always told it had to do with the fact that gas prices fluctuate so they based their price on how much they had paid for their gas and what the expected cost of the next shipment of gas would cost. That does seem to make sense, of course some people might also be price gouging. –  Glenn Nelson Mar 8 '12 at 13:33
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BTW, if you don't have GasBuddy on your phone then you are paying too much for gas. –  Jim McKeeth Mar 9 '12 at 17:34
    
kssfuels.com sells the softwere to help the gas stations decide what to charge, there website expain some of the factors. –  Ian Oct 17 '12 at 16:58
    
Something else to consider is the price listed on the big sign may not be the same as what the pump would show. I've seen a few times where there would be a difference between the sign and the pump price. –  JB King Jul 26 '13 at 18:02

8 Answers 8

up vote 32 down vote accepted

This is known as "Zone Pricing" or "Geographical Pricing".

http://articles.latimes.com/2005/jun/19/business/fi-calprice19

Such price variations may seem odd, but they are not unique to Anaheim. On any given day, in any major U.S. city, a single brand of gasoline will sell for a wide range of prices even when the cost to make and deliver the fuel is the same.

The primary culprit is zone pricing, a secret and pervasive oil company strategy to boost profits by charging dealers different amounts for fuel based on traffic volume, station amenities, nearby household incomes, the strength of competitors and other factors.

It's a controversial strategy, but the courts have thus far deemed it legal, and the Federal Trade Commission recently said the effect on consumers was ambiguous because some customers got hurt by higher prices while others benefited from lower ones.

http://en.wikipedia.org/wiki/Geographical_pricing

Zone pricing, as practiced in the gasoline industry in the United States, is the pricing of gasoline based on a complex and secret weighting of factors, such as the number of competing stations, number of vehicles, average traffic flow, population density, and geographic characteristics. This can result in two branded gas stations only a few miles apart selling gasoline at a price differential of as much as $0.50 per gallon.

But the short answer is "because they can". It's legal, provided that some people are paying less while others are paying more. Essentially the larger, richer audience is subsidizing the product for other areas. It's not terribly different than the way most drugs are priced in the world.

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Gas stations are not the only one. Grocery stores that are part of the same chain will see the same products for different prices within the same city because for the same reasons. –  Jim McKeeth Mar 6 '12 at 18:55
    
Well, not just drugs, most products are priced at what the market will bear. No sense selling for less right? –  Justicle Mar 7 '12 at 1:30
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Great answer! I figured multiple factors were in play, since no single factor explains the variance. Now if some Industry insider would publish the "secret weighting of factors"... –  Vik David Mar 8 '12 at 19:33
    
@Jim Oddly, this is not the case in East Asia. Most franchise stores (e.g. 7-11, Tesco) will have the exact same prices on most items. That's actually their main benefit over smaller stores (which have varying prices, sometimes not posted, but made up on the spot by the owner). –  dbkk Mar 9 '12 at 11:59
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This is an application what they call "price discrimination" via "market segmentation" - essentially getting people with more money to spend more for the same stuff, sometimes by tying the price to the availability of "amenities" or other conveniences (e.g. being near the freeway). Price discrimination figures most prominently in the hard-to-comprehend areas of air travel and college tuition; with commodities like gas, though, the market can only support a certain level of price discrimination before people start pumping their gas elsewhere... –  fennec Apr 25 '12 at 18:10

Location, Location, Location.

The closer to the highway, the more they can charge. People want to go less than a mile from the exit to get gas. Therefore they save time, but spend more money. That is understandable, so the gas station takes advantage of the situation.

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Always relevant, XKCD: xkcd.com/951 –  fire.eagle Mar 6 '12 at 16:44
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It also costs them gas & wear & tear to drive farther from the highway. Assuming the dropoff in price isn't too fast it can make sense to buy from the nearby station even though you know it's more. –  Loren Pechtel Mar 7 '12 at 3:19
    
Ah, xkcd. It doesn't matter how much you make in salary unless your going to get gas reduces the amount of money you make at work. Really, what you're probably making is a tradeoff with additional leisure time: you're paying several cents extra for that time. Worth it? Up to you, but it has nothing to do with minimum wage except as a random comparison point. Also remember: a penny saved is tax-free, so consider that too. :) –  fennec May 31 '12 at 14:34

There are many factors.

Most gas stations price their gas based on what it will cost them to replace it. So when their supplier raises the price that it charges the station the station typically raises its prices proportionality. The suppliers tend to have their own rates. The business needs to make a profit so the business sets the price where it feels it will make the most money.

Some stations buy bargain gas. Many people say they find this gas to be just fine. Personally some stations gas seems to make my cars run much worse. I can say that my mileage can vary by as much as 4 miles to the gallon based on where I get my gas. So I pay more to go to those stations that consistently have provided me good gasoline. However higher prices do not necessarily mean better gas. We have a BP just down the street that seems to have bad gas while one about a half a mile away that I prefer because I have never had a bad tank of gas. Both are priced about the same.

Also some localities have special tax zones. These are local taxes levied based on the location. We have 4 different zones here in Peoria IL (150k pop). That does not take into account the smaller cities around us.

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"gas stations price their gas based on what it will cost them to replace it" +1 - exactly right –  littleadv Mar 6 '12 at 21:16

I only have anecdotal evidence here as members of my family used to own a grocery store / gas station, but they were often time charged much more to have the gasoline delivered to than many gas stations which were just a mile or two away (up to 15% more). Also depending upon the branding of the gas station, they are required to use certain distributors (i.e. if you are an Exxon gas station you can only use a few select vendors) which gave them less control of their final cost. All in all the gasoline often had smaller margins than items in the grocery store, which are already extremely low.

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When I ran a gas station, our price was largely set by our neighbors-- the other gas stations in the area. We couldn't go below the current cost of replacement gas, but other than that we wanted to be at .05 over the average. (We got away with charging more because we were the last station on a major road.) Everybody else did the same thing.

Also, we only set prices once a day, early in the morning before the commuter rush. Changing prices while somebody is pumping gas Was Not Done, for fairly obvious reasons.

So, you'd get these ripples of price-changing, as one station changed its price, and then all its neighbors would react to that the next day, and then THEIR neighbors would change the day after that, and so on.

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One factor I haven't seen mentioned is volume. Suppliers will charge a slightly lower price to the station if they buy in full tanker truck loads instead of smaller quantities. Where I am this is probably still the largest factor in price spread with all newer bigger stations being 20-30 cents cheaper than the old small ones (often a repair shop with 2 pumps out front); the only reason it's slowly becoming less pronounced is that the old small stations are steadily closing up as their tanks fail leak inspections because they don't sell enough gas to justify repair and replacement.

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Some of this is demand management.

The local BJ's wholesale club sells gas $0.10-0.15/gallon less than the prevailing rate. Typically there are lines of 3-5 cars waiting for a pump during busy periods. People are price-conscious when buying gas, which draws crowds and the retailer actually wants a line -- the whole point of the gas station is to draw traffic to the warehouse club.

Other gas stations have the opposite problem -- big crowds lead to fewer people buying food and drinks in the convenience store, which is where the business actually makes its money. They want a steady stream of people. In my area, there is a gas station that is on a busy intersection right off the highway ramp going to the airport. Their problem is that people returning rental cars used to swarm the gas station and cause traffic tie-ups on the road -- a problem averted by marking up the gas $0.30.

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I'll echo: many factors.

Brand: There are generally two levels of pricing: "major brand" and "discount brand". You can generally expect the "discount brand" to cost about 5-10 cents less per gallon in the same neighborhood as "major brand" gas. This is for a number of sub-factors; chief among them is that not all gasolines are created equal. A lot of the major brands (Shell, Texaco, Chevron, BP, Exxon) have proprietary detergents and cleaning agents that the discount brands do not. They're also generally closer to the real octane rating of the gas, have less ethanol (you'll see the sign that says "contains up to 10% ethanol"; the bargain brands are right up at that limit while the top-tier brands keep it lower) and have stricter requirements about storage tank maintenance. Anyone who tells you that all gas is the same, send em my way; I tried to save a few bux buying the cheaper stuff and now my car needs an engine overhaul because of fouling causing premature wear. A couple of my co-workers got a fuel system overhaul free from the local supermarket because the storage tank wasn't properly purged, and they got water into their gas tanks.

Market Price: Yes, this is of course a factor. Generally, gas prices at the pump rise very quickly when the market price of crude or gasoline goes up, then fall more slowly than the market price, because the margins on gas sales for a C-store are very slim. When prices change, the C-stores lose either way; when prices rise they have to pay more than they got from the last tankful to buy the next one, and when prices fall they don't recoup the cost of their current tank. By quickly increasing the price to match commodities market prices, then gradually lowering them over time even if the market collapses, they mitigate the losses both ways.

Overhead: A gas station right next to a highway probably had to pay more for that land, both to buy/lease it and in property taxes. Nicer (newer, cleaner) stations generally have to pay more to stay that way. The higher your operating costs, the more you'll have to charge for your gas. You can usually do so because the nicer station will attract customers willing to pay a few cents more for the nicer facilities.

Taxation: Most States charge a tax on gasoline, in addition to a Federal tax on gas. That revenue either goes into the State's general fund, or is earmarked for transportation costs like road maintenance. California's gas prices are sky-high across the state, because they have the highest gas tax. I'm not sure Colorado, Wyoming and Montana have gas taxes at all.

Proximity to other stations: No matter what you have to pay for the land and facilities, if there's another station across the street, you have to be within a penny of their price or people will vote with their feet. While "predatory pricing" (taking a loss on sales in one area, buffered by profits elsewhere, in order to drive out competition) is technically illegal, you see it all the time in the C-store industry and it is very difficult to prove. This is a primary cause of neighborhood-to-neighborhood changes; a C-store will look around the other stations on their street corner, and the ones down the road a block or two each direction, when determining what they can sell gas for that day. The guy five blocks down has a completely different pool of competing stations.

Population Distribution: With a lot of people in a particular area, there's a big "pie" of customer dollars for C-stores to compete for. This generally leads to increased prices because the stations don't have to be AS cutthroat; regardless of how good your price is, you have only so many pumps, and at some point people will pay more to use the open pump than wait for the cheaper one. The reverse is true in rural areas; with only two stations in an entire small town, those two stations will become extremely cutthroat. However, rural prices also vary more; with only one station in easy walking distance from where you ran out of gas, they can charge you $6 to fill that gallon gas can if they want, and you'll pay it because the next gas station's another 20 miles down the road and probably has even higher prices. This, along with overhead, is generally why the Rockies states have the lowest average prices; land's cheap and people are scarce in Wyoming. But, the "price-gouging" can be seen in the rural Southwest, where there's a LOT of ground to cover between gas stations, and so the "last chance gas" along major highways just outside of town, each a nickel to a dime more than the previous station, is a common stereotype.

Transportation costs: Prices are higher on the East and West Coasts than in the Gulf States for a very simple reason; the bulk of the U.S. refinery capacity is along the Gulf Coast between Galveston and the Florida border. The further you are from there, the more it costs to get the fuel from the refinery to the gas station, and that cost is reflected at the pump. In fact, the East Coast imports gasoline by tanker even though the United States is now a net exporter of gasoline, because it's cheaper to buy it from foreign sources than it would be to watch it drip through the limited pipeline capacity that exists between the Gulf states and the Eastern Seaboard.

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