Wednesday, November 9, 2011

Econ 101: Myth-Busting Self-Service Gas

MYTH 1: Eliminating Gas Station Attendants Will Just Lead to More Profits for the Owners and No Lower Prices for Consumers.

In the comments section of the previous post on the self-service gas poll, Kari Chisholm, an enormously intelligent guy for whom I have lots of respect, gets one terribly wrong. He argues that if gas station attendants were to disappear, gas station owners would just pocket the excess profits. I am sorry Kari but this is just bad economics - and wrong.

Excess profits, or 'rents' in the economics parlance, come from market conditions. Usually rents come from some sort of market concentration (monopoly or oligopoly) that can either be 'natural' (high fixed costs prohibit potential competitors from entering), or 'created' (regulation, patents, strategic entry deterrence, etc.). Now it may be true that gas stations do capture some rents because of special regulations covering the storage of potentially toxic fuel, among other things, but I doubt it is much. You see, it doesn't take very may gas stations to make a competitive market. The reason for this is that gas is, for the most part, a completely generic product and price information is posted very visibly, so consumers are extremely price sensitive and thus to attract them you have to compete fiercely on price. [For you economics students, this is a pretty good example of Bertrand price competition, in which only a few firms will drive the price to marginal cost] Most studies have found the market for retail gas to highly competitive.

Regardless of how competitive they are, however, the real key to why Kari's suggestion is in the fact that the market conditions do not change if you eliminate attendants, so any rents that exist after the elimination of attendants would be there before as well. The only thing that will change is the marginal cost of providing gas to consumers, and this cost savings will be passed on to consumers by force of competition. [And, by the way, when John Corzine proposed the change for New Jersey, the only other state that forbids self-service, it was the gas station industry group itself that was most instrumental in killing it - which should tell you that they did not expect to make higher profits with the switch]

MYTH 2: National Average Gas Prices are a Good Counter-Factual.

No. Local gas prices are determined by, among other things, state taxes, state regulations and especially, distance to pipelines and refineries. Just saying that Oregon's gas prices are consistent with other states prices where self-service gas is allowed tells us nothing. (But, by the way, Oregon is 4th highest in the continental US for regular gas prices according to the latest data from AAA) The true counter-factual is what would happen to prices at your local gas station if the labor costs were reduced - it doesn't take an economist to figure it out. But seeing as I am an economist, here is the basic econ 101 graph of supply and demand in retail gas with two supply curves, one that includes the extra cost of attendants and the other that does not. Note that when you include attendant cost, price goes up.



MYTH 3: Full-Service is a Good Way to Boost Employment and Reduce Driving, both Noble Goals.

If you buy my argument about gas prices, you may say, but wait, don't we want higher gas prices to discourage people to drive and and thus limit the carbon that is released into the atmosphere? To which I would answer, if that is true then you can increase the tax on gas and achieve the same thing, but the difference is government captures the revenue and can then spend it on things like: lower state college tuition for the types of people that would work as a gas station attendant, investments in public transportation, etc.

Also, full-service gas, as mentioned in previous posts has ambiguous effects on overall employment. There will likely be fewer gas stations with full service and high gas prices affect other industries by raising their costs which will also raise supply curves and lower output and employment. It is quite likely that this will actually lower overall state employment, not raise it, which is why we don't mandate employment in general.

But, by the way, none of this really matters, you can keep everything they way it currently is and still give me the right to pump my own gas (while the attendant watches). Surely you can't argue against that? What I would propose, however, is that each gas station must be able to provide the service upon request, but otherwise people would be allowed to pump their own.

24 comments:

Stevelle said...

"You see, it doesn't take very may gas stations to make a competitive market. The reason for this is that gas is, for the most part, a completely generic product and price information is posted very visibly, so consumers are extremely price sensitive and thus to attract them you have to compete fiercely on price."

I remain unconvinced. While economics expects this to be true and I'm not questioning the principles, I'm not so sure that when the rubber meets the road these hold true.

1) it doesn't take many gas stations *who actually compete* -- this sweeps away (active or passive) price collusion.

2) you know that while gas is generic, location is not

And I'm not quite convinced that with the volatility of gas prices that consumers have enough information to realize that two blocks down and down the street to the right one light they can save a few cents/gal. Two stations on the same block may feel pressure, but a little distance and the effect appears to drop when I see how busy they both are.

2b) again, gas is generic but most consumers don't realize that the gas they get from two pumps on different sides of the street are chemically identical -- while branding pressures continue to try to muddy that fact with their claims of additives.

3) just how price sensitive are consumers in practice when the trade-off of seeking out and exploiting of pricing variance requires more time and the expected variance in price is less than 2%, a subtle side effect of the dramatic rise in prices we have seen in the last decade.

I know there is some research on this, but IIRC a fair bit of it is becoming dated now and doesn't necessarily account for all of these factors.

Patrick Emerson said...

stevelle,

You could be right, but even so it still does not predict that if station owners' costs decline, prices will not decline. If owners are able to price above marginal cost for the reasons you mention, there is no reason to expect this price-cost margin to increase with fewer attendants.

Jeff said...

Regarding the pocketing of profits by gasoline retailers, I agree that margins from selling gasoline at retail are thin -- for the reasons that Patrick identifies. More profit can be earned by selling junk food and impluse buys inside the store.

I'd like to hear more about why gas retailers in New Jersey lobbied against self-service gas. Did they not have pumps that take credit cards, and didn't want to make this investment? Are they really afraid of more drive-offs?





By the way, I for one hate full service gas here in Oregon. I waste huge amounts of time relative to self-service gas. I hate it when others jockey aggresively in line to secure their place in line. It's so much easier in other states.

Jeff said...

Regarding the costs imposed by full-service gasoline, Kari Chisholm said:
"Prices aren't any lower anywhere else."


But in today's Gazette Times, Marie Dodds of Oregon AAA says:
"The statewide average for regular unleaded in Oregon dropped two cents this week to $3.41. But the national average is up three cents to $3.286, and set a record high of $3.287 on Monday, said Marie

Jeff Alworth said...

[Y]ou can keep everything they way it currently is and still give me the right to pump my own gas (while the attendant watches). Surely you can't argue against that? What I would propose, however, is that each gas station must be able to provide the service upon request, but otherwise people would be allowed to pump their own.

Perhaps not as an economic matter, but I see that you have completely disregarded my carefully-crafted case about the intangibles gained from such a powerful marker of state identity. To speciously turn this into a quasi-economic argument, I offer the following: "I'm so happy to live in such a cool, unique state like Oregon," I think, as I watch a guy pump my gas, "that I'm going to go over to that there local brewpub and order up a pint of stout."

(In seriousness--very nice piece.)

Jeff Alworth said...

[Y]ou can keep everything they way it currently is and still give me the right to pump my own gas (while the attendant watches). Surely you can't argue against that? What I would propose, however, is that each gas station must be able to provide the service upon request, but otherwise people would be allowed to pump their own.

Perhaps not as an economic matter, but I see that you have completely disregarded my carefully-crafted case about the intangibles gained from such a powerful marker of state identity. To speciously turn this into a quasi-economic argument, I offer the following: "I'm so happy to live in such a cool, unique state like Oregon," I think, as I watch a guy pump my gas, "that I'm going to go over to that there local brewpub and order up a pint of stout."

(In seriousness--very nice piece.)

Pete Forsyth said...

Good post, I thoroughly agree. Keeping the law the way it is, as some kind of job protection scheme, is just dumb. Maybe we should outlaw drive-through's, too, so that Burger King has to hire more bussers. Or mandate that businesses have to hire valets to park my bicycle for me.

Kari Chisholm said...

[And, by the way, when John Corzine proposed the change for New Jersey, the only other state that forbids self-service, it was the gas station industry group itself that was most instrumental in killing it - which should tell you that they did not expect to make higher profits with the switch]

Fascinating. In Oregon, it's the station owners who are lobbying for the change - which should tell you that they do expect to make higher profits with the switch.

Patrick Emerson said...

That is fascinating. I am inclined to believe (as I said) that profits are not the motive - so what could they be and why are they so different in the two states?

Perhaps the percentage of independent gas stations? I read a quote from one industry spokesman in NJ which said something like self-service gas would kill the independent gas station and leave only Big Oil. But I am not sure why full-service would level the playing field.

Baloo said...

To all you nutjobs out there who think we should be like Washington or California or Idaho and pay even more for our fuel to have the privlege of doing the gas station's job for them, have you ever considered getting a business license and a membership at CFN, Pacific Pride or one of the other commercial wholesale fuel stations? Then you're the only one paying the higher insurance for the station, not everybody. Do the right thing, use the self service Oregon already has if you're that gung-ho for doing the station's job for them; or just move back where you came from.

Patrick Emerson said...

Are there data on insurance costs? I doubt that the rates are much higher for self-service, especially when you conider insuring the employees themselves - they may even be lower. If there were many accidents associated with S-S gas then I would expect higher rates, but I don't think there are.

Baloo said...

Just ask the station managers who have stations in Oregon and in Washington, and they'll tell you they have to charge more at their Washington locations to meet "consumer expectation" of self service. Unless you're getting your gas from a wholesaler like Pacific Pride (and thus are carrying your own insurance on your business to even become a member), you aren't going to save money pumping the gas yourself.

Patrick Emerson said...

If this is true, then why be afraid of self-service gas? If full-service is what people want and can be delivered at lower cost (something I find absurd), then most or all stations will remain full-service after the change anyway.

There should be no reason to be against allowing stations to have self-service pumps if they so desire.

Baloo said...

I question whether or not you even know what you're talking about, since full service stations are the exception, minimum service is the rule here, and it doesn't take a genius to tell that all the self service states in the region are considerably more expensive than Oregon to get gas...

darrelplant said...

Sure, jeff, the "national average" for gasoline is lower than Oregon's, but AAA's fuel price finder says that Vancouver, Washington's average is $3.433 in a self-service state. That's a whole 2/10ths of cent less than the average they show for gas in Portland ($3.445).

Sacramento, California: $3.708. San Francisco: $3.853. Those are self-serve.

Now, it's cheaper in Boise ($3.286) and Las Vegas ($3.373), but it's more expensive in Reno ($3.580).

Gas prices vary with the region (Ontario, Oregon: $3.294). Full-serve or self-serve has nothing really to do with it.

Really, just how much time are you people spending at the gas station? Are you driving something that requires you to fill up every day or something? I was commuting 20 miles each way for a year and a half and filled up less than once a week. Maybe you need to get something more economical on gas (not a bad idea in the first place) or find a less crowded gas station. If there are people jockeying for position in a full-serve station, they're going to be doing the same thing at a self-serve.

This just seems like one of those old crank issues to bitch about.

darrelplant said...

Maybe the oil companies don't actually believe all that much in your theory of competition.

'When self-service comes into a state, instead of the prices going down, they take the current price that full-serve was being sold for and that becomes the base and everything goes up from there,'' said Pam Fischer, a spokeswoman for AAA New Jersey. ''We keep asking the oil companies to give us a guarantee that the price will go down, but they're never willing to do that.''Robert Kelly, president of the Garden State Fuel and Automotive Industry Association, goes one step further, comparing the petroleum industry with Microsoft in its quest to be both supplier and retailer.

''With self-serve, oil companies can control the market,'' said Mr. Kelly, whose organization represents some 300 service stations throughout the state. ''They'll be in charge from the ground to the tank, with no one interfering in the middle. They won't need dealers. They'll be able to set prices and what little competition there is will be gone.''

But the Garden State associsation is not as rabidly opposed to self-service in New Jersey as its predecessor, the previously powerful New Jersey Gas Retailers Association, which led the fight in the 1970's to ban self serve here. Recognizing improvements in technology and some conveniences afforded by self-serve, Mr. Kelly said the association would be willing to support self-service if procedures were instituted to prevent oil companies from operating as wholesalers and retailers at the same time. Such regulations are currently in place in seven other states, Mr. Kelly said.

Patrick Emerson said...

I know of this argument and have referenced it, but as yet I have seen no explanation as to why the presence of a few minimum wage gas attendants changes anything about the competitive situation in retail gas.

What is preventing gas companies from following precisely the same strategy regardless of self-serve gas?

I am not arguing for or against any regulation of anti-competitive practices, but if such a concern exists, certainly a few pump attendants is not the answer.

Patrick Emerson said...

BTW, Washington's gas tax is is 4 cents higher than Oregon's. So if all else is realtively equal in the two markets (PDX and Vancouver), that might give us an idea of how much to expect gas prices to drop - 4 to 5 cents a gallon.

But this really isn't my point, I simply see no point in BANNING self-service.

Patrick Emerson said...

Apparently if you include local taxes, the difference in WA and OR gas taxes is 7 cents.

http://www.wsdot.wa.gov/NR/rdonlyres/FDBD2C88-CFAD-4133-BB76-AF290C3C33B3/0/ProjectedGasTaxComparision.pdf

Baloo said...

I'm not sure your math about how much cheaper self service would be based on Washington's gas tax, given that Washington gas prices are 10+ cents more than Oregon.

darrelplant said...

Apparently if you include local taxes, the difference in WA and OR gas taxes is 7 cents.

According to AAA:

Ontario, Oregon: $3.292 (full-serve)
Spokane, Washington: $3.441 (self-serve)

That's almost a 15-cent difference, biased in favor of the full-serve price, in two cities on the far east border of their relative states. Gonna have to come up with a better explanation.

Baloo said...

darrelplant: That looks suspiciously like a mini-serve price. Full service prices in Oregon are about as high as self-service in Washington. Just pumping your gas for you isn't full service, that's minimum service. Full service also gets you clean windows, tire pressures, coolant and oil checked.

Charles Pergiel said...

Something is wrong with the date function on your blog. The date of this post is shown as Wednesday, November 9, 2011. The date on the comments is shown as April 2, 2008. Today is November 4, 2011.

Empee said...

The absurdity of lower prices per gallon being mini-served is in reference to the insurance. With special training it costs less to insure the staff as opposed to every customer buying gas.
Full-service is not the answer, simply because its emphasis is on the novelty services provided, but mini-serve on the other hand is more like a server at a restaurant meets a lifeguard at a pool.
There's some macro safety issues and general crowd control that goes on with mini-serve, but aside from tackling short-term unemployment (there is obviously high turn-over at minimum wage), mini-serve attendants are trained to handle the gasoline with a respect to the local environment. Through a few simple procedures, each gas station can save over a hundred gallons from being needlessly spilled.
I think it should be nation-wide.