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 shopping.”

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 says.

“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.”