Friday, April 21, 2006

How much people REALLY optimize on gas, and

I roughly agree w/Miserly Bastard's comments on how NY consumers are likely to optimize only on a macro level.

Active gas price optimization is likely irrelevant to most New Yorkers for any number of reasons -- I don't even have a driver's license.

I do have lots of 2nd hand observations that seem consistent w/the optimization side of this post (people living under different working/driving conditions) -- lots of my friends who live in small towns in MA and have ~1 hour drives to work, plus more driving for work, and have horrendously large gas bills -- they definitely do seek to price-optimize in a extreme fashion (perhaps to an inoptimal degree, even taking into account the large and negative beta of their wealth to gas prices, at least compared to most New Yorkers).

I also know a surpisingly large number of frugal Asian parents who do engage in this sort of behavior, but that may not be particularly generalizable to the overall population (though a roughly proportional % of the non-Asian people I know who are that age, also engage in such behavior, albeit in a smaller sample than my already small and self-selected sample).

Part of my argument is a bit circular, like many efficient market arguments -- consumers are efficient enough -- that is, sufficient numbers are optimization prone beyond what would be rational for them, or else truckers and taxidrivers are the equivalent of arbitrageurs. A further financey take: gas station owners don't price discriminate in favor of such drivers to the degree that would be needed to really negate their competition inducing effects. I definitely see certain stations w/huge cab populations in Manhattan, but that might be a demonstration of extreme price sensitivity, network effects such as drivers wanting to socialize, perks such as clean and free bathrooms, geographical oddities, etc

As a result, when prices go up, the average consumer _doesn't_ need to pay lots of attention. As a note for the noneconomist, "although the term "discrimination" has negative connotations, "price discrimination" is merely a technical term meaning differentiation in price to increase efficiency."

I also think that indicates that at least some people care enough about micro-optimization to make the info publicly available for free, and others access it. Gasbuddy allows you to search by zip code for various gas prices – people actually go to the trouble of posting live observations (surprisingly frequently).

One theory is that when prices go down, the "parent from the WW II generation" category of consumer is more likely to become lax in optimization, making arbitrage bounds sufficiently broad despite the "arbitrageur" taxi and truck drivers, that gas stations can lag in price (as per my original post)

MB's original comment:
"I dont think that most consumers price-shop for gasoline, except at a very macro level.

What I mean is that there is a certain point where consumer preferences are indistinguishable between price points. For instance, consumers cannot notice the difference between $2.33 a gallon and $2.34 a gallon, unless the information is presented to them simultaneously and truly all other factors are held equal (e.g., gas stations across the street from each other).

As a practical matter, most consumers won't know the difference between how much gas costs on the upper west side vs. downtown, even though price discrepancies probably exist. Only the most saavy consumers of gasoline (e.g., NYC cabbies), can probably make price distinctions for gasoline between filling stations in a local area, and even then, they probably rely on proxies for price information such as the "reputation" that a particular station or brand may have as offering lower prices. (Think Wal-Mart's brand proxy of "Everyday Low Prices" as a substitute for actual price information).

Only at the very macro levels can consumers distinguish between price differences in gas stations, such as "it is cheaper to fill up in Jersey than in the city, so I better tank up before the tunnel."


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