Price dispersion and income

When I was growing up, gasoline generally sold for about 33 cents a gallon. Some stations charged 32 cents, while others charged 34 cents, but there was relatively little variation (over time or geographically.)

When I moved to Orange County, I was surprised by the degree of price dispersion.  It’s not unusual to see gasoline prices vary by 50 or even 75 cents between two outlets only a few miles apart.  Even in percentage terms, that’s much more price dispersion than I saw back in the 1960s.

On a recent trip to Tanzania, I observed the opposite pattern, a very high level of price uniformity.  Almost every station charged around 3100 shillings per liter, with only tiny price variations.  So what explains these differences in price dispersion?

You might assume that price differences reflect cost differences.  Perhaps some gas stations in Orange County bought a shipment of gasoline at a higher price than the neighboring station.  But that cannot be a complete explanation.  Even if their cost basis differed, you might expect consumers to rebel against paying more at one station than another.  Most consumers don’t care what they gas station paid their wholesaler; they just want to buy the product at the lowest price possible.

Instead, I suspect that income differences explain variations in price dispersion.  It relatively affluent Orange County, consumers prefer not to spend a lot of time driving around looking for the best deal.  Because of a high opportunity cost of time, gas stations have a bit more market power than they’d have in a perfect frictionless market.  In Tanzania, incomes are quite low, and gas stations would lack customers if they charged even one percent more than their competition.

Of course, this is just one anecdote.  But I’ve observed the same pattern in China, where there is less price dispersion for a wide range of goods than in the US.

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