Economists Have Caught Up to The Gas Game

Thanks to GasBuddy Patrick DeHaan, I now have in my possession two recent academic papers by economists that analyze gas price behavior in the Midwest and, with a strong dose of statistics, reach the type of conclusions that we’ve been writing about for a decade.

Prof. Matthew S. Lewis of Ohio State University has written, “Price Leadership and Coordination in Retail Gasoline Markets with Price Cycles“, which will appear in the International Journal of Industrial Organization.  Here is the first half of the abstract of his paper:

This study examines the coordination mechanism used by gasoline stations in the midwestern United States where prices exhibit highly cyclical fluctuations known as Edgeworth cycles.  Stations in these markets repeatedly coordinate large marketwide price increases following periods of aggressive price undercutting. By studying these periodic price jumps both over time and across cities, I find that a particular retail chain in each city acts as a price leader initiating each price restoration. The leader signals the new price level to competitors by simultaneously jumping prices at all its stations to a single price. Competitors follow quickly with a large majority of stations jumping to the exact same price within a 24 hour period.

The “particular retail chain” he refers to for Michigan and nearby states is Speedway.  What a surprise!

The second paper is written by three economists at the Federal Trade Commission — Paul R. Zimmerman, John M. Yun, Christopher T. Taylor.  Here is an excerpt from the abstract for their paper:

Like others who have examined cycling, we show that a relatively small number of U.S. cities in contiguous upper Midwestern states evidence price cycling. However, our lengthy data set allows us to see that these cities began cycling in 2000. Thus, we can examine prices in cycling and non-cycling cites before and after cycling and, controlling for other factors, find prices are lower in cities that began cycling.

The charts in this paper, showing the change in pricing behavior before and after 2000, are compelling.  As we continue our celebration of the 10 years of The Gas Game, we now understand our secret origin — we started gas price hike predictions two years after cycling began in the Midwest.

Message to Prof. Lewis and the FTC writers:  What took you so long to figure all this out?  Why can’t I find a reference to the The Gas Game in either of your papers?  I’m a professor — I know how the credit thing works in academia.  I have priority!  Actually, thanks for providing the statistical proof of what we’ve observed for a long time.

Updated: January 17, 2012 — 8:13 pm

11 Comments

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  1. In the paper, there is no conclusion as to weather the consumer is hurt or helped by this type of pricing.

    Obviously, one would think that, if you always purchase your gasoline during the bottom of the pricing swing, say just prior to a reset, you would probably do better than if the pricing cycles were not in existence. And if you always buy gas prior to the weekend, you would probably be paying more than someone outside the Midwest. But truly random (or ‘when needed’) purchasing as in whenever your tank was down by ¾, how would that person fair in this Midwest pricing scheme compared to the steady pricing found in other states? I Dunno, and that is why I endeavor to fill my tank at or near the bottom of the pricing resets, and why I thank you folks here for all your help and analysis. I have driven my car as far as 320 miles before filling up just to keep off the peak pricing, and filled up with as little as 4 gallons (88 miles), to be sure I am not paying top $$ for my gas. Again, thanks to all you guys here and at Gas Buddy.

  2. Now I’d like to see this story on the local news. Should make for interesting feedback from people.

  3. February sweeps begins on Thursday, February 2. I’m sure you can find one of our 4 local TV news stations that would find this a more compelling “special, hard hitting, investigative report” than telling us people are using food stamps to buy the cheapest cans of pop, pour out the pop in the street, return the empty cans for a meager cash deposit, then use that cash to buy cigarettes, a crack rock, or whatever:

    http://www.wwmt.com/sections/contactus/

    http://www.woodtv.com/subindex/about_us/report_it

    http://www.fox17online.com/fox17-news-tips-form,0,5070040.customform

    http://www.wzzm13.com/company/about_us/contact.aspx or http://www.wzzm13.com/news/news_tip.aspx

  4. I also agree that 2000 was the target year. It was that spring that “high” gas prices first became an issue. The highest I saw prices in Kalamazoo that whole year was $1.999. Prior to that, the highest I’d ever seen prices was around $1.359, except around August 1990 when prices went to the $1.40s after Saddam Hussein invaded Kuwait (and we learned what he and his dad had in common: neither one of them knew when to pull out).

    This “60 Minutes” story also marks 2000 as a key year, as that is when Enron got regulations reduced: http://www.cbsnews.com/video/watch/?id=4713523n&tag=mncol;lst;2

    On Wednesday, January 8, 2003 around 8:00 p.m. I observed prices in Kalamazoo ranging from $1.479 to $1.599. It appears that was a day Speedway had gone up to $1.599 and two independent stations still hadn’t followed yet.

    January 2005 resets in west Michigan:
    Week 2 (Jan. 6) – Thursday, $1.899
    Week 3 (Jan. 12) – Wednesday, $1.939
    Week 4 (Jan. 20) – Thursday, $1.959
    Week 5 (Jan. 26) – Wednesday, $2.089

    On Friday, January 27, 2006, gas prices in west Michigan reset to $2.399.

    On Monday, January 30, 2006, $2.499 was the new price.

  5. Are you sure The Spike Line rack adjustment is correct? Last night, it was -4¢ something. Now, it is +.77¢, a number it has been recently before. I’m thinking you somehow reinserted old data. This is important, because a 4.77+¢ difference is a day or two difference in predicting the exact day prices will go up. Where do you get the information for the rack adjustment?

    It is interesting to see the Chicago spot fell 3.09¢ yesterday while New York futures settled up 5.41¢. That’s an 8.5¢ difference. Meanwhile, WTI oil was essentially unchanged, down 12¢ to $100.59.

  6. Diether, the numbers are correct. I’m not seeing the number you see, however. Nothing was in the negative this week.

    As for the Chicago market falling while national is rising, that’s because the Mid-west was high due to refinery issues and spills. It shouldn’t fall far for long, but it seems the weekend is safe for now.

  7. I feel it has been going on for longer than 10 years – I have been driving the same commute since 1988 and with it being a long one, I’m sensitive to gas prices. I remember the adjustment was a mere 10 cents on price of a dollar and change, and it took a while to propagate. It became more noticeable when gas became more expensive and the ‘Dime Thursday’ became ‘double Dime’.

  8. Turbo46032 is right. Here in Fort Wayne, back in the early 90’s, the jump was 10 cents, and would take two weeks to come down and then jump again. The propagation was slow, and I could drive to stations in the outskirts where I lived and still get gas cheaper. When we went over $2.25, it jumped 20 cents, and now that we are over $2.75, it jumps 30 cents. I don’t know who drove the resets back in the early 90’s. I think Checker owned a lot of stations that were bought by Speedway. Maybe it was them, I don’t know. But today, the jump is instantaneous, you have to know a station or two that hold out longer than the others if you miss the prediction here, or don’t do your own analysis.

  9. Meijer text messages almost always say they will raise prices at 2 p.m. For the most part, as I have posted data previously, GasBuddy reports show this to be correct.

    Admiral stations are the ones that hold out the longest across Michigan, finally going up somewhere around 3 to 5 p.m.

    Since Speedway consistently (as I have frequently posted the GasBuddy report times) raises prices at 9:30 a.m. to 10:30 a.m., there is usually still at least 4 hours to get gas for the previous price at Meijer or Admiral.

  10. @Deither-

    Another thing to consider is that not all Speedway locations hike right away either. A couple of Speedway stations around here in Lansing also hold out- one until around 4:00 pm, and another that holds out until the evening, and sometimes even into the night. There is also a Speedway between Lansing and East Lansing that has been known to, after hiking, drop the price back down for the evening commute and the adjacent morning commute.

    Typically the only other holdouts are Admiral, Clark, and sometimes a local chain called Quality Dairy.

  11. Thanks for all your comments!

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