Because consumers are so sensitive to the price of gasoline it makes an excellent loss leader – what other product could a supermarket draw so many customers with by discounting 40 cents off of a total purchase? Customers are already trained to scan the price signs out on the curb for the lowest price in town. Thus big retailers could theoretically sell at zero (or negative) margin and make it up on lift on in-store items.

The upshot of these two phenomenon (perceived collusion during hypercompetition and the efficiency of some business models at zero gasoline margin)have led over a dozen states and provinces to pass minimum price laws that prevent discounting gasoline below a certain positive margin, often calculated to keep efficient independent service stations in business.

Some references:
http://econ-www.mit.edu/about/download_pdf.php?id=12
http://economics.ca/2006/papers/0571.pdf

What exactly is “price-gouging” anyway? Is it charging as much as you can for the product you sell? Isn’t that what we all do when we sell our homes? Isn’t that what supermarkets do and restaurants do and E-Bay merchants do? I work for an airline, and I’m positive airlines sell their product for as much as they can. Why is it suddenly “price-gouging” when a gasoline station does exactly what everyone else does?

First off, understand that they all sell the same stuff and pay the same for it. For all the different brands of gasoline out there, there are really only three kinds in any one town – the government-mandated regular, premium, and in-between mixes. (Drive to the next town, and it might be a different government recipe at a different price, but every brand still has to be the same.) Ignore oil company advertising, they know there’s nothing special about their products and will quite happily buy and sell gasoline with the other brands to keep their stations supplied. Your Mobile station may actually be pumping Shell today, and the Shell station may be pumping Mobile next week. If one brand was delivering fuel for half a cent less, they’d probably get orders from every station in town until they ran out – and you’d have station operators trying to figure out if they could afford to throw in another half cent of their own money to take customers from the other stations, but soon after one of them does that, the others will notice a drop in their business, look at their competitors’ signs, and rush out to match them.

OTOH, when costs go up, they estimate the bare minimum price raise needed to stay profitable, and then keep an eye on their competition as everyone changes their signs.

You don’t get perfect price tracking like this for other products because most markets are imperfect. You have to walk into the stores to find the prices, and unless your time is worthless and you aren’t burning gasoline to go to the next store, it takes more than a few cents price difference to make shopping around worthwhile. Different brands are actually different, so comparing prices also involves trying to estimate how much quality and feature differences are worth.

What would you expect to see when retailers are competing on price? If I own a gasoline station on a busy corner, I’m going to immediately match the price change of the station across the street.

For what it’s worth, I rarely see the exact same gasoline price all over the Dallas suburbs. The Murphy stations outside Wal-Marts are usually lowest, but also generally have queues. Valero and its subsidiary, Diamond Shamrock, are generally just a few cents higher but without the wait.

I only disagree about reducing the gasoline tax, which is basically a user fee. 80% or 85% of the tax funds highway building and maintenance. If we can’t eliminate government owned highways (a different issue), the gasoline tax seems the cheapest and fairest funding mechanism. That tax has not been adjusted for inflation or for increased fuel efficiencies.

I only disagree about reducing the gasoline tax, which is basically a user fee. 80% or 85% of the tax funds highway building and maintenance. If we can’t eliminate government owned highways (a different issue), the gasoline tax seems the cheapest and fairest funding mechanism. That tax has not been adjusted for inflation or for increased fuel efficiencies.