Could Price Comparison Apps Be Making Gas MORE Expensive? | The Professor Is In

And I bet those high price consultants we were talking
about just a minute ago may well have litigated this.
So if there are any of them out there, drop
a note in the comments, and you can even do
it anonymously so your employer won't fire you.
I'm Megan Connors and.
I'm Justin Wolfers. This is the professor is in. Think
of this as office hours, where I'm here to answer
your questions.
Last week you proved that gas prices do indeed rise
like rockets, but fall like feathers as they respond to
changes in the cost of oil. Today we're going to
answer some follow up questions on the topic. Okay, so
first question, this asymmetric pattern of rising like rockets falling
like feathers, is that something we typically just see with
gas prices or does it show up more broadly in
other places.
You always expect me to know everything about every product.
That's hard. So when oil prices rise, the cost of
producing gas rises, and what happens is gas rises very
very quickly within a lot of the adjustment happens within
a week. There's been a lot of that happening with
the Iran war. When oil price is full, which by
the way, happens whenever we think peace might break out.
Gas prices don't fall immediately. They seem to drop like
a feather, and those of us who buy gas, that's
very frustrating. So it's been most clearly found for gasoline.
There's research also showing it happens for diesel. Now you
might say, well, there's still a whole rest to the economy.
For the rest of the economy, the biggest friction we're
pricing is actually a slightly different one. There might be
some of this, I'm not sure. I don't think there's
enough nerds running enough regressions. I never think there's enough
nerds running enough regressions. But the biggest friction in the
rest of the economy is actually business conditions change and
prices stata same. That price stickiness, that's the word we use,
is actually a really important driver of what happens to
the macro economy. Okay, so what happens is the economy
starts to boom, people want to buy more stuff or
costs go up, but firms keep their prices fixed. The
typical duration of a price in the economy is round
about twelve months, so it's not like shopkeepers are out
there saying something change. Let me get out my price changer.
Prices really get stuck for quite a long time. Now,
you and I can think about lots of reasons, and
I think folks at home can think about lots of
reasons like you don't want to pay the cost of
changing your prices, or that's not a big thing, but
it to frustrates your customers. There's a lot of possible reasons.
What's equally interesting is how this disrupts the logic of markets.
When we teach introduct your economics, we talk about supply
and demand, and then there's an equilibrium price where supply
equals demand. When we move to macroeconomics, we talk about
the ups and downs of the business cycle, which sounds
like we're not getting to that happy equilibrium. Well, if
a lot of businesses are keeping their prices stuck for
quite a long time, the supply and demand dynamics that
get us back to equilibrium gets stuck. And then they
get stuck for me, and then they might get stuck
for the firms that are upstream and downstream of me,
or that compete with me, and that can have big effects.
And it's actually a big reason why we might think
that the economy doesn't instantaneously adjust to a range of
economic shocks.
Are those menu costs? Is that what we call them
when it's hard to try? I actually I worked at
a restaurant and as a teenager, and I remember it
was like a big deal any time that we needed
to reprint menus and change the cost.
So this is the metaphor, and I think it's important.
So let me go back. What we're just describing is
across the macro economy, people don't move prices very often,
even as business conditions change a lot. We call that
sticky prices. It's sticky a relative to what you might
think would happen. And then the metaphor that economists used
for this is they call it menu costs, which is,
at a literal level, they meant that restaurant you worked at,
printing up laminated menus every three weeks would be a
waste of a lot of money. Now the important thing here, though, Megan,
is it's a metaphor. Right. I bet if you went
back to that restaurant today, you'd sit down, you'd scan
a QR code. And so if you thought menu costs
were literally the cost of changing prices which did used
to be more printing menus, changing the price tags on
the stores. They're obviously not very big anymore, but the
phenomenon persists, which is why I think you should think
of it as a metaphor.
Is there and you might not know the answer to
this question, but I would suspect that maybe, is it
possible prices are getting less sticky as we move toward
a more digital world.
I think that's a reasonable expectation, but there's no strong
evidence that's happening. And again, the reason is menu costs
are a metaphor. So at that restaurant which he worked,
was you're the only person in the whole economy Megan,
for whom it wasn't a metaphor. But if every time
I went to get my hair cut, my hairdress had
changed the price, I'd be like, what is up with this?
And I kind of feel betrayed every time she raised it,
and I'd feel a little bit special every time she
lowered it, And she just wants to avoid that whole discussion.
And so that's the moment when I think think about
this as a broader set of constraints, where there's something
between buys and sellers where have just a great conin
change prices that often one.
Of the mechanisms that you mentioned as being responsible for
gas prices falling more slowly has to do with the
supply chain and the fact that up and down the
supply chain, people aren't just responding to kind of the
latest price of oil, but the cost of any inventory
they may have. A lot of people kind of mentioned
in the comments that this doesn't seem to slow things
down on the way up, like you would expect that
same mechanism to work on the way up, And I
was just wondering if you could kind of maybe say
more to that or explain why that doesn't occur.
One of the things I love about my plotypals is
anytime I'm sluppy, I get colled out on it. And
honestly I was a little bit sluppy, so forgive me.
There's a couple of things I want to pick up there. One,
when I was talking about supply chains, I also should
have talked about production. So if you think about a
different isymmetry, there is an isymmetry. It's it's very easy
to cut back production. Just tell your workers not to
turn up tomorrow, Just turn the machines off in. Increasing
production might be a lot more difficult, So you've got
to hire more people, you've got to try and maybe
add a second shift. You've got to get hold of
resources that you don't already have, and so on. So
that's a different form of asymmetry. That's an asymmetry coming
out of production. I use the word supply chain instead.
What I really want to do is just emphasize to folks, Look,
if you're thinking about gas prices and oil, realize you
can't just think about oil coming out of the ground,
and you can't just think about two gas stations on
a corner. There's a whole set of markets in between,
and we should think about those as potential sources of
all of this. Let's come back to what I did say,
which was I said, well, because of past the inventory
blah blah blah, the oil that I already bought last month,
that's a sunk cost. Whether I bought it for a
high price or a low price actually shouldn't really matter.
And so as I was talking about the price of
existing inventory, I could sort of hear myself being unclear.
So there are storage costs and inventory carrying costs and
so having too much is expensive in a way that
if you have too little, it's expensive in a different way.
So that's again the asymmetry. The point is the moment
you've got an asymmetry and you know, either raising prices
versus lowering them. That could also come from an asymmetry
in raising production versus lowering production. And that's the point,
which is, let's go all the way back from the
gas at the gas station to how it got here,
which was turning oil into gas, and are the asymmetries there.
In your piece, you also mentioned that there could be
a bit of what we call price scouging going on here,
although that's difficult to prove. I was wondering if you
could take a step back and just speak a bit
more about what price scouging is in general. I feel
like that word gets thrown around a bunch, but is
there an actual, like technical definition.
Let me set the table first. The point that I
tried to make in the video is this. The fact
is true, prices rise like a rocket, they fall like
a feather. The interpretation, though, is open, which is it
could be that they're price gouging on the way down.
It could be that people's behavioral responses are we search
less when prices are coming down, and that puts less
market pressure on businesses to cut their prices. And then
you can think about the asymmetries we just talked about
in the production thing. The reason I want to go
back through that is, Notice I'm not saying it's not
price gouging. I'm saying this simple fact could be any
one of three things. I don't think we let gas
stations off the hook. We simply can't declare you guilty
and lock you up based on that. The other thing
I want to notice is, even if these are different explanations,
TACIT collusion is one of the explanations. Even with these
different explanations, notice that the consumer is getting soaked either way.
These are explanations for why prices float down like a feather.
An explanation is different than Hayman does it cost more
than it should? Does that piss you off being taken
advantage of? I think prices well above marginal costs, So
there's profitability. But what's earning a profit versus taking advantage off?
I At some level, anytime a monopoly offers something for
a high price, you know, Microsoft Window, Microsoft Word, costs
fifty bucks a year. You can only buy it from Microsoft.
Is that price gouging because it costs them nothing to
produce one more license for it? Right? Netflix? If I
were to join Netflix, they're going to charge me what
is it, twenty bucks a month? Now fifteen bucks a month?
The cost of sending those bits and bytes down a
cable to me is about a penny a month. Is
that taking advantage? So there's I think taking advantage. We
should just recognize that as a social judgment. So it's
not something that I, as an economists could say, because
there's the flip side, which is I know it when
I see it. Right, So if it's a snowstorm and
I'm selling snow shovels for four hundred dollars apart, that
feels like price gouging. Now there's also a whole different
school of econom and I don't want us to get
stuck here. Who would then argue that's actually a really
good idea. Why? Because the only the person who wants
the snowshovel the most is the person who gets it. Now,
it's also the person who can afford it the most
who gets it. That's a very deep trade off.
So on that note, I mean, I feel like I've
heard of times of the government like investigating price gouging.
What are they looking for when they do that, and
what policy tools exist, if any, to kind of prevent
this or is it all just for show?
So let me clarify something I just said. An economist
finds it hard to define price gouging doesn't mean it
doesn't exist, and doesn't mean it's not socially awful. It
just means it doesn't naturally pop out of how I
think about my framework, and I want to acknowledge my
framework lacks things. Like I said, let's call it a
social convention, and so my frameworks applying de Man lacks
social conventions. That's why I think the most honest thing
I could do is say, hey, Megan, what do you
think price gouging is? Because it means something to you
and find it offensive, and you might even be willing
to support legislation to outlaw it. So there are a
bunch of states that have anti price gouging laws for
the very good reasons that you would defend. And it's
not that I'm against you, Megan, It's that I don't
feel they have a lot to offer. So what are
they looking for in those cases? I think you probably
have to look at the legislation. Let me tell you
one more secret, which is there's a whole field of
economics called industrial organization, and the whole field of consultants
that get paid enormous amounts of money to turn up
in court to either say that wasn't price gouging, that
there was price gouging. And if I was one of
those consultants, I could not afford to do this video
right now because I would be on the stand earning
two thousand dollars an hour. And that's why I'm not
going to give you a very good answer.
So one of the strategies that you mentioned the customers
should use is to shop around more when prices are
starting to decline. You mentioned apps like gas Buddy, and
I'm just curious, you know, do these apps? Do those
primarily benefit custom or could they also kind of help
facilitate that tacit collusion that you mentioned happens among gas stations,
Like where do the chips ball on that regard?
What a great question, and I'm just going to tell
you the truth. I had never thought about it that way.
I think one half of the question is very very easy.
When customers know more, customers can make better and more
informed choices. But that's what well economists call partial equilibrium.
It's only thinking about one side of the market. And
if you recall the story about tacit collusion, is oil
prices rise, so I raise my gas price to five bucks.
Meghan raises hers to five bucks as well. We both
understand there's a temptation for me to cut my price,
which is all steal all Meghan's business. But I also
understand she'll immediately retaliate, so therefore I'll steal all of
Meghan's business for two and a half seconds. Well, now
it doesn't feel like such a good idea, does it.
And so the fact that I can see what Meghan does, sorry,
that Meghan can see what I do and respond so quickly,
is what gives me an incentive not to cut my
and so I guess anything that speeds that up potentially
helps tacit collusion. Now I want to give you the
yes and version. Okay, So the fact that two gas
stations are across the road and they can see each
other signs immediately, that makes tacit collusion much much more possible.
If they're on up sides of town, it would take
a day or two for them to notice. And now
all of a sudden, I might think I can sneak
a price cut. Megan's not going to notice, and now
that's the reason why I'm going to cut my price.
So that breaks the tacit collusion if Megan can't see.
If I believe Meghan's not going to see my price
cut and respond, now when we're across the street from
each other, that enforces the tacit collusion. Now what does
gas Buddy do? Gas Buddy make sure not only that
it's as if Meghan is across the street from me,
but it's also as if one hundred other gas stations
across the street from me. So the good news is
if any of them cuts their price, they're going to
get a lot of customers because customers can see what happens.
But also, now I'm here and I'm thinking should I
cut my price, and I'm like, oh, cricky, Everyone's going
to see immediately. Therefore everyone's going to respond immediately. Therefore,
you know, maybe I don't want to cut my price.
So I could imagine gas buddy going either ways and
I bet those high price consultants we were talking about
just a minute ago may well have litigated this. So
if there are any of them out there, drop a
note in the comments, and you can even do it
anonymously so your employer won't fire you.
So to wrap up this conversation, I wanted to talk
about the bet that you made a few months ago
with Stacey Vanocksmith about gas prices on the eve of
the midterm election. You bet that the national average would
be less than three dollars and sixty cents at that time.
She bet that it would be above that. And I
just wanted to check in on how you're feeling. Does
anything from this analysis or recent events change your mind
or solidify your opinion. Just wanted to get kind of
a pulse check.
So what was funny was we made that bet months ago,
and it was in the midst of the Iran war,
and I thought when I said gas prices are going
to be three sixty, I thought I was saying, wow,
there's still going to be and a whole bunch of people,
including Stacey, and I think, including you, are like, you're crazy,
justin that's not high and let me show you high.
Felt like a crocodile undue moment. So what's I think
the most There's two important factors here that we've talked
about that I think are important. The first is the
Iran war is the number one and the strata of
them is the number one thing driving oil prices. So
when peace broke out for that glorious day and a half,
when the President announced a memorandum of understanding which basically
said we agree that in the future we hope will
have an agreement, which I think is terrific. I am
glad that they agreed that they want an agreement. I
just wish they had actually had an agreement. And by
the way, don't be surprised next time you sign an
agreement that you hope that there'll be an agreement if
neither side then abides by the agreement that they agreed
that they wanted to agree to it but hadn't yet agreed
to right, Just don't be surprised. That's just not sign
in human nature. It's just the world. So when peace
broke out, I looked really good. Now last couple of days,
it turns out we're back to bombing Iran. President has
said he thinks the truce is off, They're still going
to keep talking because talking is better than bombing. Always.
Talking is cheap relative to bombing. Talking saves lives, Talking
saves economies. Talking is always worth it. But it looks
like we're going to be in July with strife. Now,
this is where we can tie this into rockets and feathers.
If the oil price goes up, we learned the gas
price goes straight up, but for it's come down, maybe
half of that occurs in three to four weeks, and
all of it occurs within eight weeks. Well, we're now
about sixteen, you know, or a few months away from
the election, So there'll be another good check in another
couple of months when this rocks and feathers thing could
actually determine where that progress in Iran leads to progress
at the pump before the punter's head to the polls.
How is that for a lot of peace?
It's great And from my point of view, I'm hoping
that you win this bet for all of us could
be a very good sign.
Yeah, not just for gas prices, but because gas prices
would likely be low because the world is the safe,
a more peaceful and more prosperous place.
Well, on that note, thank you so much for taking
time to answer these questions to her.
And I would just say a huge thank you because
I do a lot of interviews on TV and stuff
where they just ask you the easy stuff, and it's
a pretty good econ one. I one teacher, I sort
of know how to answer it. And the great thing
about our community is those questions were all so rich
and if I felt unconvincing, it's because you were watching
me think through it on my feet and I think, actually,
that's the most fun part of economics, isn't it, Meghan,
which is thinking something through together, and we just had
a moment to do that.
So thank you absolutely, And if you want us to
think through any of your other questions in a future segment,
just leave a comment wherever you are listening or watching
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