Gas Price Variance Up!
With the whole country bemoaning the rise in the average price of gas, a far more economically surprising change has been almost overlooked: The massive rise in the variance of the price of gas. Before the hurricane, the spread between the highest and lowest price of gas in Northern Virginia was about 10 cents. Now a half hour drive to Manassas revealed a four-fold increase in the spread, with prices ranging from $2.99 to $3.39.
Basic supply-and-demand of course predicts that a foreseeable decrease in gas production will instantly raise the price of gas. But I don’t know of any theory that predicts a rise in variance.
My best guess is that the hurricane reveals substantial heterogeneity in the values and/or beliefs of whoever sets prices in local gas stations. (The owners, I guess, but correct me if I’m wrong).
Values story: Some price-setters are actually willing to give up some profit to feel like they are pricing “fairly”; others are happy to “gouge.” Most are somewhere in the middle.
Beliefs story: Some price-setters believe that customers will get really angry and hold it against them if they price “unfairly”; others figure that customers will forget any gouging grudges pretty quickly. Again, most are somewhere in the middle.
During normal times, these differences in values and beliefs are dormant. But a disaster gives them a chance to show themselves. Of course, if the disaster goes on indefinitely, then fairness norms of both owners and customers are likely to change. Owners won’t be willing to lose money forever, and customers are unlikely to permanently boycott a convenient gas station for doing what every other station does too.
On balance, I’m glad that there are some firms run by people who freely gouge. When the gas runs out at the $2.99 station, I know where I’m going to fill up.