Pump Prices High? Don’t Bother Shopping Around

UBC Reports | Vol. 55 | No. 2 | Feb.
5, 2009

Pump Prices High? Don’t Bother Shopping Around

By Basil Waugh and
Derek Moscato

When gas prices skyrocket, who doesn’t look around
for bargains?

According to a new UBC study, that is precisely the wrong
time to shop around. Consumers are better off comparison
shopping when prices are dropping, the study finds.
And with pump prices falling in recent times, that means
the time for looking around is now.

UBC Sauder School of Business assistant professors Ambarish
Chandra and Mariano Tappata recently studied daily gas prices
at 25,000 U.S. gas stations for an 18-month period. They
found significant pricing differences when gas prices were
low or moderate, but these differences diminished or disappeared
when prices where high.

“People are really shopping around for gas at the
wrong time,” says Chandra. “There are bargains
out there, but at the price valleys, not the peaks. The differences
between prices shrink when the price is high.”

Chandra says the study was motivated by anecdotal observations
of significant fluctuations in the price of retail gasoline
sold at gas stations, even though gasoline is a relatively
standardized and homogenous product.

They found myriad reasons for fluctuations in gas prices.
The price of oil is a key factor, but there are other variables
that can impact pricing, including location, brand power,
number of neighboring stations and amenities such as car
washes, convenience stores and number of pumps.

“When oil prices spike, as they did last summer, gas
station owners find their profit margins squeezed and they
have a smaller range of prices that they can profitably set,” Tappata
says. “Shopping around during these periods really
doesn’t pay off.”

Gas stations have more flexibility around pricing strategies
when oil prices are moderate, Tappata says. “That is
when you will find particular stations charging relatively
higher prices, hoping to catch consumers who are not comparison

On the flipside, low oil prices also enable stations to
lower prices and still be profitable. “That is when
many stations will try to target price-sensitive consumers,
attempting to drive sales by slashing their prices,” Chandra

“If you are willing to shop around, that’s when
you’ll find the bargains.”

Chandra, who says the U.S. and Canadian retail gasoline
markets are very similar, expects the results to apply in
Canada. “But
the lack of data availability from the Canadian market prevents
us from doing the same study right now for Canada.”