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Why does it seem gas prices rise fast, fall slow?

Q. Why does it seem like gas prices rise quickly, but take longer to fall? - Sherry, Tampa A. This is a case where the skeptics are correct. Retail gas prices do rise quickly, but take longer to fall. Still, that doesn't necessarily mean there's a conspiracy among stations.
Customers, apparently, share the blame. When prices start rising, people start aggressively shopping around for the cheapest price. So stations don't dare raise prices much over their wholesale costs. But when prices start falling, customers tend to relax, and that allows stations to keep retail prices artificially high. "If a consumer sees that gas prices at one station have fallen since the last time he bought gas, he may not look to see if there are even lower prices," said Matthew Lewis, an economist at Ohio State University who studies gas price data. "When gas prices are falling, consumers aren't searching as hard for the best price." The technical term is "Asymmetric Price Adjustment," and it's been observed in dozens of consumer goods around the world. Lewis also saw this relaxation mindset among consumers by measuring traffic to Web sites that track gas prices. When prices were rising, there were huge surges in traffic on those sites as everyone scrambled to find a good deal. But as prices started falling, so did the traffic on those sites – fewer people were searching for a deal once they felt their local station started lowering prices. Another free-market minded economist, Sam Peltzman, studied 77 different consumer goods and 165 producer goods and found the same trend in prices across the board: speed going up, not so much going down. In one study, he confessed bluntly, "the person in the street is right and we are wrong." It also means the real money in selling gas, is made as prices are falling – slowly. When prices are rising, Lewis calculated, stations tend to keep their margins tight, at about 4.8 cents per gallon. When prices are stable, they tend to make profits of about 13.4 cents per gallon. But when prices are falling, Lewis found stations could generate profits of 28.9 cents per gallon. It's worth noting that owners of local stations claim only a few pennies in profit on each gallon. To come up with that conclusion, Lewis compared data from hundreds of gas stations in California, and wholesale gas prices from the U.S. Department of Energy. The result is a graph that shows both wholesale and station prices spiking sharply up, then as the wholesale price falls, station prices tend to fall slower. Lewis also looked into the possibility of pure collusion between stations to see if they were working in a group to keep profits up as prices fell. But if stations were colluding, there would be telltale markers in the data – with many stations in a region keeping prices high, while one or two stations broke ranks and tried to attract more customers by dropping prices. The result would be prices dropping at different rates in the same market. But that's not what he found. "The lowest prices in the city fall just as slowly as the highest prices do," Lewis found. "So there isn't the breakdown in collusion that you would expect." Tom Kloza, publisher of the Oil Price Information Service, said there's a great myth that retail stations make huge profits when prices swing higher. But the reality, he said, is retailers can lose money during that phase because their wholesale prices are rising and consumers are eager to drive elsewhere for a better deal. "When wholesale prices drop, there is no compelling reason to match the decreases," Kloza said. "To a great extent, this is when retailers can simply draw a breath." To test all this economic theory, you can start a stopwatch now, because gas prices have been rising quickly in the past few months but petroleum prices just collapsed last week. Right now, a gallon of regular unleaded now averages $3.883 in Tampa Bay, down from $3.894 a week ago, and up from $3.733 a month ago. Eight local stations charged more than $4 per gallon. So retail gas prices should start dropping soon, if people are willing to keep shopping around. [email protected] (813) 259-7919 Follow Richard Mullins on Twitter, @DailyDeadline.
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