PGD-I4: The beauty of competition

I don't know if anyone else has noticed, but current gas prices are pretty sweet. I took this picture several weeks ago because gas had fallen below $3. I couldn't believe it! Surely, I thought, the trend could not last long, and it had to be documented.



Well, I was driving to school this morning and I saw that two gas stations near my flat have gas for $2.01.

Yes. $2.01.

How is that possible, you might be wondering. Certainly, gas prices aren't that low in Northern Virginia ... not to mention California. Just to add to the ridiculousness of the matter, only a half mile away, there is a gas station selling its cheapest gas at $2.19.

Again. I'm guessing that this is puzzling.

My guess, based on my knowledge of economic theory, draws on a couple factors about the locations of these gas stations. Gas Stations A and B are located on opposing sides of an intersection that is relatively well-traveled, but not a major route through Williamsburg. Gas Station C, however, is located on one of the five or so major roads. There are also no other gas stations on this road for a couple miles. Further, Gas Station A is privately owned, while Gas Station B is owned by a typical gas station that can be found through most of the U.S.

Therein lies the beauty of competition. Gas Station C has no direct competition, even though it is only located a half mile from the other two. Anyone driving down that major road without insider knowledge about A and B will get gas at C. Gas Station C is located next to the entrance to a major highway, as well as a lot of fast food. Tourists come across it regularly, and they're in a hurry. They want to buy gas and get some food quickly. They are also probably coming from larger metropolitan areas so they think that $2.19 for gas is a pretty sweet deal. In contrast, Stations A and B are in a mainly residential and local area. Plus, locals like me compare gas prices and know where to go.

Further, Station B has to match the price of Station A because it is right across the street. Because A is privately owned, it can set different prices. Of course, it has to make a profit, so it can't set a price below cost (whatever that really is). Actually, they probably aren't making much money. Gas prices at $2 are not sustainable for long. But the fact that both gas stations are selling at that price proves the point. Competition is beautiful. I've been watching these two gas stations set steadily lower prices for four weeks now, and my jaw still drops whenever I drive by and see such low prices. Competition is so good for the consumer, as long as that consumer is willing to do some research.

Granted, this is a very simplistic example of competition. I'm sure there are some economic aspects to the argument that have not been covered, and I know enough economists who could correct those points for me if they wanted to. However, it remains interesting. It is a post-graduate discovery because it is an example of something in real life that I learned about as an undergrad.

Here's hoping for a stable economy ... please?