Fuel for Thought

by Don Boudreaux on August 16, 2006

in Prices

This morning I happened to see a gasoline-station employee manually change the prices displayed in large numerals on the station’s sign post.  The per-gallon prices before the change were $3.01 9/10 (for 87 octane); $3.12 9/10 (for 89 octane); and $3.25 9/10 (for 93 octane).

The prices for the 89- and 93-octane blends fell by one cent each (that is, to $3.11 9/10 and $3.24 9/10, respectively).  But the price for the 87-octane blend fell by two cents — to $2.99 9/10.

At first I wondered at this difference, and then — discussing the matter with my wife, Karol — realized that if the price of the 87-octane blend were cut by only one cent, the new price of that blend would have been $3.00 9/10.  Karol and I agree that we’ve never seen gasoline priced with two zeros immediately after the decimal point — that is, we’ve never seen gasoline priced at $1.00 9/10 or at $2.00 9/10 or at $3.00 9/10.

My reading of the literature on the phenomena of (what to call it?) "99-cent pricing" is that a good, compelling explanation has yet to be found.  But unlike some of my more hyper-rationalist economist colleagues, I don’t dismiss the psychology-based explanation that many consumers in fact act as though there’s a larger absolute difference between prices of, say, $2.99 and $3.00 than between prices of $3.01 and $3.02.

So here’s a threshold question: Am I alone in not being able to recall ever seeing gasoline priced in whole-dollars (plus the 9/10)?

Be Sociable, Share!

Comments

comments

Add a Comment    Share Share    Print    Email

{ 25 comments }

Brian Moore August 16, 2006 at 2:09 pm

I definitely think it's a psychology thing. On some level, the physical "length" of the number's characters in relation to other numbers matters in lowest levels of our brains. Especially in goods where the prices are stack up vertically, like gas prices often are. It's also extremely easy to compare prices (look across the street at the other station) and so people can be very sensitive to prices.

If I see the following prices for gas:

.99
.98
1.02
.89

My brain immediately dismisses the 3rd price, then goes back and looks at the others to find the lowest. A seller doesn't want to be eliminated like that.

Chris August 16, 2006 at 2:28 pm

Aren't you demonstrating the psychological effect by rounding those gas prices down?

After all $2.99 9/10 is essentially $3.00 and $3.01 9/10 is essentially $3.02.

Trevor August 16, 2006 at 4:16 pm

Don, it's interesting you mention this. I believe this is definitely a pychological phenomenon, and one that allows producers to maximize the value of competitive pricing.

I think gas prices are similar in this regard to housing prices, where leading a price with the smallest digit possible that can still maximize value for the seller is key. In other words, a house going for $299,999 looks more appealing at first glance than one going for $300,000 — despite the fact that the difference in price is a mere dollar — because to many people the former is a "two hundred thousand dollar house," whereas the latter is a "three hundred thousand dollar house."

A much more realistic situation would be a house priced at $299,999 that was really worth $307,999. To any seller, $8,000 is likely a good chunk of change with which few of us would prefer to have to part, but I would be willing to bet that any savvy homeowner or realtor would be willing to forego that $8,000 if sticking to a tag of $307,999 meant discouraging any number of potential buyers looking to spend their money on a house in the "$200,000 range."

(On a side note, if I ask my wife how much something cost that she has purchased, she is much more likely to round DOWN than up. I.e., if she buys something for $199, she'll tell me it cost "a hundred dollars" before she'll say "two hundred." Therefore, a house advertised for $299,999 would be a $200,000 house, while one advertised for $300,000 would still be a $300,000 house. Wacky, to be sure, but definitely food for thought.)

Clearly any of these situations can be highly relative. But it doesn't discount the fact that sellers will always maximize their chances to sell, and such maximization usually occurs when the price is led by the lowest digit possible.

David Zemens August 16, 2006 at 4:44 pm

I don't ever recall seeing gas prices at an even-dollar (1, 2 or 3.00 9/10)

It seems they're always $X.99 9/10 or $X.01 9/10

Masonry August 16, 2006 at 6:56 pm

Do gas stations keep enough zeros around to do that? How many zeros does a 3-octane station need to keep around for each sign?

Other than that it must be a psychological issue.

k hagen August 16, 2006 at 7:53 pm

Masonry has a point. It could also be a digit supply issue.

I vaguely recall that, when gas prices spiked to $3.3x 9/10 last year, many local retailers had to quickly improvise extra "threes" for their signs and displays.

Geardaddy August 16, 2006 at 9:58 pm

My experience in the manufacturing industry supports the perception, at least, that there's a psychological advantage to non-round numbers. My current employer and my former employer – both business owners – would tweak price quotes to avoid even dollar amounts.

James Pyrich August 16, 2006 at 10:24 pm

For some odd reason, at our company, instead of marking up prices to reflect a desired profit margin, would rather round up to even dollar amounts.

Then again, this is a policy handed on down by the president who is… a little "special." But you didn't hear that from me.

Ales August 17, 2006 at 6:13 am

In the Czech Republic, these .99 prices are called "Bata's prices", because of the famous shoemaker Bata, whose company started using them in the 1920s (they were really good at marketing).

LowcountryJoe August 17, 2006 at 6:47 am

The practice in retailing circles is known as "odd pricing".

http://en.wikipedia.org/wiki/Psychological_pricing

Kevin Brancato August 17, 2006 at 4:12 pm

I have never seen $1.00 9/10, $2.00 9/10, or $3.00 9/10, however, the probability that one have these has never happened is roughly zero… And a very quick Google search on GasBuddy reveals a claim that just last week the price of regular unleaded at the Spokane Costco was $3.00 9/10.

"I kust saw a posting of the Spokane Costco and it was 3.00. Now that's odd!"

Search for "3.00" on the page; the comment was written by "havagal" on 8/9/2006 at 9:40:40 PM.

http://www.gasbuddy.com/Forum_MSG.aspx?master=1&category=1056&topic=218643&page_no=1&FAV=N or
http://tinyurl.com/hbqrz

Gil August 17, 2006 at 7:41 pm

Not just a claim, but it lists a price. At least right now there are 3.00 prices here (at a Safeway and an Exxon):

http://www.seattlegasprices.com/Everett/index.aspx

But, perusing the gasbuddy sites confirms that the phenomenon of jumping from 2.99 to 3.01 is VERY common in many areas. So, it's real.

Rex Pjesky August 17, 2006 at 8:16 pm

We have several stations that have "plus" grade gas priced at 3.00 9/10.

I wonder if the pattern you saw in the change in gas prices was a strange coincidence.

After all, if stations had no prefernce for or against x.00 9/10 prices, you still wouldn't see it very often. About 1 percent of the time.

John Henry August 17, 2006 at 9:36 pm

Here in Puerto Rico (USA) we went to liters back in the 80's when gas first topped $1.00/gal. This was a way to avoid gas stations having to buy new pumps. So I have no testimony about pricing in even dollars. Current price is about 70 cents/l.

Last fall when prices spiked, our local legislature in its infinite wisdom passed a law requiring pricing to .7 instead of .9 cents. Thus I pay 70.7 cents/l.

The rationale, isn't it always? was to save the consumer money. Two problems with this, though:

1) Gas stations were free to raise their prices to the next higher .7 cents. Many probably did, nobody kows.

2) If I buy 40 liters of gas (a tankful), I save 8 cents total because of this. YAAAAY!!!! Sure I'll vote for you. However, the gas station, assuming that it would have lowered the price by .2 cents and that it pumps 100,000 liters/month will earn $2,000 less profit and, assuming a 40% marginal tax rate, pay $800 less in taxes. Multiply this by a thousand stations and you are talking about significant tax revenue loss.

I think it illustrates the stupidity of politicians. They forgo close to a million in tax revenue to give the consumer a meaningless saving.

This at a time when our budget was in such bad shape that they had to shut down for a week.

Oy vey. God save us from stupid pols.

John Henry

God Podcast on dictators, BTW. I just got around to listening to it today.

colson August 18, 2006 at 12:35 am

I know wal-mart has low prices but isn't that how they often sell themselves as being the "low price" leader? When competitors are at, say, $.95 for a can of soup, wal-mart prices at $.93 or $.94. I guess it is one reason that the penny will still need to be around for a while :)

Jay Croft August 18, 2006 at 6:03 pm

If this is a psychological phenomenon, then it is American psychology. In Europe where VAT is included, most prices are rounded to the nearest 10.

Travis August 19, 2006 at 6:13 am

Dr. Boudreau;

The issue is not how the gas is priced, but who prices it. Should it be priced by the vendors that own it, or some ignorant bureaucrat? Of course, Hayek told us why bureaucrats cannot price anything.

Interestingly, the discussion of gas prices almost universally (even amongst Austrian or quasi-Austrian economists) fails to mention the role that price plays in rationing supplies of any good or service.

Travis Cork CU '67

cheno August 19, 2006 at 8:58 am

It is not based solely on psychology. Go to mom and pop gas stations in which the cash register is operated by the owner. You will find "even zero" pricing regularly on all sorts of products. This is because the owner is making the change, not an employee. Owners live in fear that their employees will steal from them. By forcing them to make change and open the register, the risks of stealing increase. When in college, I actually did a field test of area stores to confirm this theory as part of an economics class. With respect to gas, many people select a gallon total instead of a dollar total (or full tank) when filling up. And yes, many people still pay cash for gas.

dave s August 21, 2006 at 8:54 am

I remember 20 and nine tenths, during a gas war when I was about ten. Does that help? My father told me when he was a boy he saw seven and a half cents a gallon – before the 9/10 thing hardened into concrete.

happyjuggler0 August 21, 2006 at 10:59 am

This cartoon link isn't about gas prices ending in 9, but it is economics relevant in *something* ending in 9.

http://www.dispatch.com/editorials/editorials.php?story=dispatch/2006/08/04/20060804-A8-01.html

loikll August 21, 2006 at 12:53 pm

Seems pretty simple to me. There's not much difference between 2.99 and 3.00, but there's a BIG difference between 2 and 3. If that first, big number on the sign reads "3" and the guy across the street lowers his first number to "2", that's an attention-getter.

I just wish someone would be ballsy enough to lose the silly nine-tenths and see what happens.

nick August 21, 2006 at 5:23 pm

Making a buying decision that adds useful knowledge rather than noise to the market, and that actually benefits the buyer, entails some costs, called mental transaction costs.

Psychological pricing like the $X.99 phenomena provides examples of mental transaction costs, as do common consumer preferences for fixed over variable pricing. See http://unenumerated.blogspot.com/2006/08/psychological-pricing-and-mental.html

shane August 22, 2006 at 7:35 am

Oil prices leapt above $72 a barrel Wednesday, settling at a record high for the third straight day after a government report showed shrinking U.S. gasoline supplies and traders fretted about nuclear tensions between Iran and the international community.

Supply constraints in Iraq, Nigeria and the Gulf of Mexico are also pushing oil prices higher, and analysts are predicting more pain at the pump this summer for motorists, who so far appear to be only lightly tapping the brakes on demand.

Light sweet crude for May delivery climbed as high as $72.40 a barrel, before settling at $72.17 on the New York Mercantile Exchange, an increase of 82 cents from the previous day. The contract had risen as high as $71.60 on Tuesday.

Mike Carpenter October 10, 2006 at 12:17 pm

While returning from a long weekend in the outer banks, I saw regular unleaded for $2.009/gal at a 7-11 on Prince William County parkway near the intersection with Davis Ford Road. It's interesting that less than two months ago you were writing about gas prices hovering around the $3/gal mark, while now we're seeing the price around $2/gal — and on a holiday weekend! I'm not one of those willing to bet my life's savings on an upturn in gasoline prices following the November elections!

Jimmy T November 27, 2007 at 5:25 pm

I was just wondering why when oil was at $72 a barrel we were paying $3.10 a gallon. Now with oil around $94 a barrel gas is around $3.00 a gallon. Can someone explain this.

Previous post:

Next post: