Thread: Gasoline prices
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Old 09-23-2015, 04:53 PM   #13
CoolandtheGang
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Quote:
Originally Posted by 8gv View Post
I see this as a factor when the prices are dropping. Maybe someone in the business can chime in to correct me. How I think it works:

A station pays a back door price at time of delivery.

When a competing station gets a delivery with a lower back door price their retail price is lower.

The consumer chooses the lower price station thus expediting the liquidation of its inventory.

The higher priced station sells its inventory more slowly.

When the lower priced station gets another, cheaper, delivery the price difference is made even greater.

Now the higher priced station is really stuck and may have to capitulate to selling at a loss to keep the cash coming in and more importantly, get access to cheaper product coming into the back door.
A very simplistic answer:

For your average service station they really don't care the price they paid for what they currently have in their tanks (last delivery), they are pricing to cover their next delivery; i.e. replacement cost. Essentially the initial investment in their service station included full storage tanks of gasoline. They then sell that gasoline to raise the funds to purchase more gasoline and in the process they hopefully make a couple of cents net profit. That is how they can make money when prices go up OR down. By and large, service stations prefer declining/lower prices.
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