In a stunning display of economic illiteracy Connecticut is mulling a bill to force all gasoline wholesalers to sell gas at the same price to all retailers in the state. [More here] This is a form of price fixing that will drive down prices for rich people, drive up prices for poor people, cause shortages for everyone and not alter the wholesale price structure in the long run. Why do the people of Connecticut think such an idea can possibly work?
It’s called zone pricing because instead of negotiating a price with every retailer separately, wholesalers have traditionally calculated prices based on the price levels of an entire area. This practice has its roots in the early days of gasoline retailing when one guy in a gas truck went around doling out varying amounts of gas to each retailer and recording the transactions on a clipboard. It was an easier information-management solution to just set the same price for all of the truck’s customers. Given the enormous competitive pressures on the price of gas, most retailers in the same general area charge the same price anyway, so setting up independent negotiations was a waste of everyone’s time.
I suppose that with computerized accounting today they could pretty simply break down pricing to the individual retailer, but this would have little effect on the prices that consumers pay or the profits of the retailers. Most retailers sell gasoline for cost and make their profit on secondary items or services. They have no incentive to compete with one another on the price of gas. All the individual retail locations that compete with one another will end up charging roughly the same price regardless of how the wholesalers negotiate their pricing.
If wholesalers have to charge the same price to everyone in the state, they will simply average the prices from all areas. This means the prices at the top and bottom of the price scale will converge to the middle. Currently-high prices will go lower and currently-low prices will go higher. Since rich people currently pay high prices they will get a discount and since poor people currently pay lower prices they will pay a premium. The system will subsidize the gas use of the rich with the money of the poor, but won’t provide lower gas prices to the state as a whole
And I thought it was libertarians that don’t care about the poor?
The market’s response to this will be to segment the wholesalers into those that supply upscale areas and those who supply downscale areas. The upscale wholesalers will charge all of their customers more than the downscale wholesalers charge all of their customers, and the system will end up with zone pricing again.
In the end this policy will screw over the poor short-term without altering the price structure of wholesale gas sales long-term. Why would they even bother?