How Competition Impacts Gas Prices

A variety of factors determine the price at the pump.

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Patrick DeHaan is a senior analyst at gasbuddy.com.

Competition. It's a simple word, yet a very complex and all encompassing word that covers many angles when it comes to how gasoline prices are determined. It seems so easy to explain, but don't let that trick you—it's incredibly difficult to explain and adequately understand.

Say you're on a Sunday afternoon drive, and notice a gas station near you charging $3.50. Down the road a few miles, that price could easily be 10 or more cents higher or lower than that $3.50 you passed a few miles back. The question many have posed quite simply is "how" or "why" is that? Think of it this way. Are you more likely to get a better deal on a car if there are two very similar car dealers next to each other? Perhaps, because it’s easy for people to be swayed by the price of the car. Say there is a third similar car dealer a few miles away. Is he going to be at the same level of competition and sell his cars for the same price as the two dealers next to each other? Likely not. He may have his dealership in a more affluent area and charge more to his well-to-do customers. Maybe his dealer is outside of the city by itself and the land value isn't as high, so his taxes aren't as high. Maybe people don't know that there are two other dealers down the road. Perhaps the car manufacturer is selling cars at a higher price or offering a volume discount.

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All of these situations can and do take place at gas stations. All of them, and even more factors, can impact what a station will charge. Timing can greatly impact what price a gas station charges as well! Many motorists fail to realize that the price a station pays for gasoline changes daily. If one station gets lucky and buys gas on Monday and the cost goes up Tuesday, the station that bought on Monday doesn't necessarily have to raise prices like the station that bought on Tuesday. This can alter what you pay at the pump. Maybe the station that got caught buying for a higher price on Tuesday will pass that higher cost on by raising its gas price at the pump. Maybe that would be difficult if the station that bought Monday doesn't follow suit.

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Perhaps the difference is what brand the station is—branded stations (such as Exxon, Mobil, BP, Shell, etc.) usually pay a slightly higher cost for their gasoline. In turn for paying a higher cost, those stations are guaranteed first supply in the event of a refinery problem or emergency situation. Independent stations don't pay as much, but aren't guaranteed supply.

While competition sounds easy to understand, there are, and always will be, a multitude of factors that could alter what one station charges vs. the next. Keep in mind how many variables there are next time you fill up.

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