Fuel prices have been in the news again this week. As the New Zealand Herald reported:
Whangārei motorists have been paying some of the highest average fuel prices in the country, but the reason why has remained unanswered despite a recent Commerce Commission report.
The revelation comes after fuel reached $3 per litre overnight on Monday in the Whangārei area, a price that is becoming all too familiar.
Questions have been raised as to why prices are so high despite international shipping and local transport costs being lower due to the Marsden Point terminal being situated nearby.
The prices for Regular 91 in Whangārei were comparable to other regions in the June 2022 quarter, however, the prices were the most expensive when compared countrywide for the last three quarters.
As the Commerce Commission will well know, costs are not the only determinant of price. In a supply and demand model of the market, costs only represent the supply side of the market. Demand matters too, and in particular the shape of demand. When there is less competition, consumers have fewer alternative options to choose from (fewer substitutes), and demand will be less elastic. Sellers can raise prices with less concern about their consumers going elsewhere. As I have noted before, competition matters for retail fuel pricing.
However, I want to pick up on this other part of that New Zealand Herald article:
People in the area who are struggling to make ends meet are frustrated and confused by the prices and notable unfairness.
Mother-of-three Amy Cullen said she is living “pay cheque to pay cheque”, despite having two incomes.
“I’m on my [fuel] light most of the time. I never really fill up full; I try to do it when there are fuel discounts on,” she said.
Cullen said her family has been budgeting “really hard” to make ends meet, forfeiting certain things and letting bills go into arrears so she can prioritise what is getting paid for.
She said she didn’t understand why prices were so high compared to other regions, despite Marsden Point being nearby.
“It’s frustrating,” she said.
Research by Nobel Prize winner Daniel Kahneman (and described in his book Thinking, Fast and Slow as well as Richard Thaler's Misbehaving: The Making of Behavioral Economics, which I reviewed here) shows that consumers are willing to pay higher prices when sellers face higher costs (consumers are willing to share the burden of the higher costs). They see those higher prices as fair. However, consumers are much less willing to pay higher prices when those higher prices result from higher demand - they see those price increases as unfair. This likely extends to higher prices that result from lower levels of competition that grant firms more market power. Consumers likely see those higher prices as unfair as well. Fairness is important, as I have noted before (see here and here, for example).
So, while higher fuel prices in Whangārei are explainable by lower competition, that doesn't excuse those higher prices in the eyes of consumers. What will be interesting will be whether those higher prices are excused in the eyes of the Commerce Commission, which are now keenly focused on them.
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