HAMDEN, Conn. -- A study by three Quinnipiac University School of Business economics professorsclaims that zone pricing practices by gasoline retailers translate into fairerand lowerprices at the pump.
Suspicious of the practice of charging different prices for gasoline based on the location of the gas station, Connecticut lawmakers have sought to outlaw it. A bill banning zone pricing failed last year, but several proposals have been submitted by legislators this year. In general, gasoline is more expensive in areas where one or more of these conditions [image-nocss] exists: Demand is high, incomes are high and there is little competition. Conversely, it's lower in poorer areas and where there may be many stations, they said.
The Connecticut Petroleum Council, part of the American Petroleum Institute (API), asked professors Christopher Ball, Mark Gius and Matthew Rafferty to study the economics of zone pricing. The professors determined not only that zone pricing is beneficial to gasoline consumers, but the practice falls perfectly in line with the basic supply-and-demand economic principles they review in the classroom, the university said.
We found when zone pricing is banned, those stations in low-competition areas don't have reason to lower their prices. It was a little surprising to me that it really raises the price all over the state, that it was so dramatic and that it lined up so well with incomes, Ball said. That was as I expected, but it was a little more stark than I realized.
The professors cautioned that many factors determine the price of gasoline, and that it is illegal for the retailers themselves to set the pump price.
Charging different prices to different consumers is not a sign the market isn't working well. It's actually typical of many markets, Rafferty said. This type of phenomenon is extremely common in all markets. We charge lower prices for children and senior citizens to go to museums and movies. It's not in and of itself evidence of a monopoly exerting monopoly power.
The professors said they hope the results of their six-month study will prompt lawmakers to abandon their attempts to ban zone pricing.
Under a zone pricing ban, retail prices in most of Connecticut would increase at least 2.5 cents a gallon, except in Fairfield County, which would see little or no change in prices, the study said, according to a report by The New Haven Register. Greater New Haven would see increases of 7.5 cents a gallon and up. Certain areasincluding New Haven, East Haven, West Haven and Hamdenwould see prices spike more than 10 cents a gallon.
In areas such as Fairfield County, where there are fewer gas stations because towns there don't want as many of them, dealers face less competitive pressure, so oil companies charge higher wholesale prices, Gius said.
In Connecticut, state law requires that oil companies can own stations, but those stations must be leased and operated by a separate dealer and not the oil company, the newspaper said. About a third of the state's stations are operated by dealers. Those stations, which sell more than half of the state's gasoline, are the only ones affected by zone pricing because they buy oil directly from the big oil companies. The other two-thirds of the state's station owners buy gasoline on the spot market in New Haven Harbor, or are affiliated with supermarkets or discount clubs such as Sam's Club, which are not subject to zone pricing.
Lawmakers who want to ban zone pricing argue that setting a uniform wholesale price for dealers who buy gasoline from oil companies would result in lower retail prices, the paper said; however, the study found that a ban would lead oil companies to set a uniform wholesale price above the current average, raising prices in all areas except Fairfield County.
Currently, there are nine bills before the state legislature pertaining to zone pricing, most of which aim to ban it, according to the paper.
"Eliminating zone pricing will reduce prices," State Senator Bob Duff (D) told the Register. He is sponsoring legislation that would impose a ban. "What you'll end up having is a level playing field." If all dealers are charged the same wholesale price, a competitive marketplace will keep retail prices in checkand relatively similarin all areas as well, he said.
State Attorney General Richard Blumenthal has been urging a zone pricing ban since the early 1990s, and said Monday that he disagrees with the Quinnipiac study's findings. "Zone pricing has nothing to do with competition," he told the paper. Oil companies should not be allowed to charge different wholesale prices in different areas of the state "according to what they perceive as ability to pay," he said, noting that the study was commissioned by a group representing what he called "Big Oil."
But Steve Guveyan, executive director of the Connecticut Petroleum Council, said it made sense for the group to sponsor the study because only the large oil companies could provide the study's authors with the wholesale price information they needed.
Similar legislation has been introduced each year for many years, but has never passed. Last year, a measure passed the state Senate but was defeated in the state House of Representatives. Several other states have considered banning zone pricing but no states have done so.Members help make our journalism possible. Become a CSP member today and unlock exclusive benefits, including unlimited access to all of our content. Sign up here.