Why doesn’t competition bring the gas price down?

Posted by Don Fullerton on Apr 28, 2011

Filed Under (Environmental Policy, Other Topics, U.S. Fiscal Policy)

I just read the new blog by my colleague Nolan Miller, called “Gas prices on the rise. If you can’t beat ‘em, fine ‘em.”  I have a reaction, which I would have uploaded as a “comment”, except I could not figure out how to do that!  He writes about the fact that one gas station near the Orlando airport charges $5.69 per gallon, and he points out that we should not be surprised, since the station will charge whatever they can get folks to pay!  I’ve also been late for my plane, with an empty rental car tank that needs to be filled before I can return it.  Anyway, the point that my good friend Nolan never addresses is: Why doesn’t competition bring the gas price down?  It seems like somebody could open a station across the street, and charge “only” $5.60 per gallon and take all their business.  That of course would induce the station in question to charge $5.50 per gallon, with further responses until they  both settle on a price somewhere lower than $5.69.  Why does that not happen?  First of all, it must take time for that to happen.  I hope somebody is working on it!  Second, however, the land right across the street from that station is probably very expensive, because whoever owns that land has a great business opportunity!  But if somebody has to pay a high price for that land, then they have to charge a high price for gasoline just to break even.  Markets are complicated, and interesting, and that’s why many of us are so fascinated by the study of economics!