A lesson in the economics of gas prices:

Mike Wolfe and Frank Fritz spend all day every day driving in their van looking for deals.  In episode after episode of “American Pickers,” their frugality lures them to spend $5 dollars here and $15 dollars there, with the occasional hundreds of dollars spent on “that rare gem.”  Admittedly, these guys are always looking to “save a buck” or “make a buck” – which seem to be one-in-the-same these days.  As economists, at the end of each show we’re often left wondering: did they make enough to even cover the cost of their gas for this show?

So, we thought we’d let them in on a little economic expert secret about how to predict retail gas prices in certain markets, to help them get the lowest gasoline prices around.  Have you ever heard of something called “Edgeworth Cycles?”  Probably not (and, Mike and Frank, if you’re reading this – I hate to tell you it has nothing to do with vintage bicycles).  An Edgeworth Cycle refers to a pricing cycle in markets for commodity goods where consumers are very sensitive to price changes. These cycles exist in many countries, including some cities in the Midwestern United States.

Retail gasoline markets are great examples of markets where Edgeworth cycling is present.  A cycle occurs likes this.  One competitor will begin to cut gas prices.  Other competitors immediately react by matching or further undercutting their prices, until the retail price equals the wholesale price the retailer paid for the gasoline.  Then, gas prices will begin to rise again and eventually the cycle repeats itself.  In some countries such as Australia and Norway, the cycles are so evident that consumers often only by gas on certain days (when prices are supposed to be the lowest). 

Tips for Mike and Frank:

• Gasoline markets characterized by competition from many smaller or independent retailers often demonstrate Edgeworth cycling.  

- This could be great for Mike and Frank to secure bottom-dollar gas prices as we often see them driving around areas where there may be many independent gas retailers. 

• Large competitors typically make the first move to restore gas prices.

- Mike and Frank, continue to stay away from the big guys and seek out your unique, small vendors. 

• Each cycle troughs every one to two weeks.

- Translation: Mike and Frank, don’t wait for that “icebreaker deal,” just fill up when prices look cheap. 

• If you want to know how to predict when gas prices will be at their lowest in cities where Edgeworth cycles exist, just let Edgeworth Economics do the work for you!