ST. LOUIS -- A new analysis finds that consumers can save money on gasoline fill-ups by taking advantage of market pricing cyclicality.
Gas prices in many Midwest cities tend to change in a cyclical saw-tooth pattern, according to senior economist YiLi Chien and research associate Paul Morris of the Federal Reserve Bank of St. Louis. In St. Louis, the cyclical pattern is particularly consistent, beginning with a big price increase followed by small price declines, followed by another large price increase. Prices most typically jump on Thursdays, Fridays or Saturdays, possibly in response to higher anticipated demand during the weekend.
It’s a pricing pattern known as Edgeworth cycles. “Gas stations undercut each other on price to gain business,” the analysts said in an essay on the phenomenon. “When retail gas prices approach the wholesale cost of gasoline, a more dominant firm will increase its prices. Other gas stations follow suit, thereby resetting the cycle.”
Morris and Chien observed that market concentration influences the degree of cyclicality. For example:
- When a few retailers dominate the market, they have no incentive to drop prices.
- When there are many competitors, individual retailers cannot easily “reset the cycle” by raising their gas prices.
- In intermediately concentrated markets—which includes several Midwestern cities, such as St. Louis—cyclical gas pricing is much more common. That’s because while a few retailers may be price leaders, they do not have enough influence to keep pricing steady in the market.
For consumers, this means certain days of the week tend see the lowest retail gas prices. Using St. Louis market pricing data from GasBuddy, analysts first determined the difference between the weekly gas price average and the gas price for each day to separate the cyclical movement from other factors that affect gasoline prices, such as the price of oil. They then averaged the differences across 25 full weeks from October 2015 to March 2016.
The result? Buying gasoline in St. Louis on a Tuesday or Wednesday was up to 8 or 9 cents per gallon (CPG) on average less expensive than on a Friday or Saturday. Assuming a motorist fills up a 15-gallon tank each week, this equates to a savings of more than $60 a year.
Although fuel retailers would have to change price in a less predictable way if more consumers shifted their gasoline purchases to Tuesdays or Wednesdays, this scenario is unlikely, the analysts said. Most consumers are not aware of the cyclical price changes, and even if they were, some may not believe it would be worth changing when they fuel up just to save a few dollars a month.
Because gasoline prices in St. Louis seems to change together, it suggests that motorists will pick a different gas station to get the lowest price. “However, our finding suggests that consumers are less willing to substitute the timing of their gasoline purchases,” the analysts said. “Gasoline can be a necessity, so waiting to fill up may not be an option for many people.”
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