I don't disagree with your experience. I've had the same (my 92 Tracker ran
much better on premium than regular). I've also had the reverse (after
replacing the engine (for reasons unrelated to fuel grade), I found no
difference between premium and regular). I tell my students that economic
theory is less about individual behavior than about aggregate behavior. As
long as there are some (some = "not too small a population") people who
perceive equal performance between premium and unleaded, we'll get the
substitution effect I described.
Antony
-----Original Message-----
From: Brian Eggleston [mailto:egglesto@augie.edu]
Sent: Monday, September 12, 2005 10:22 PM
To: antony@antolin-davies.com; tch-econ@elon.edu; dcoffin@iun.edu
Subject: RE: Relative prices of grades of gasoline
I don't think it is any more likely that the Chevy driver would use premium
than it would be for the Lexus driver to use regular. I think these markets
are fairly well segmented.
You seem to yet maintain that there's really only a perceived difference
between regular and premium's quality. I think that's empirically false.
I'm quite critical and more than a bit cynical at times. I'm acutely
sensitive to hype. I truly wish my vehicles ran as well on regular as on
premium but they simply do not.
Brian Eggleston
>>> "Antony Davies, Ph.D." <antony@antolin-davies.com> 09/12/05 8:41 PM
>>> >>>
Where high-end car owners are concerned, it may not matter whether or not
premium and regular grades are of equal quality. The perceived risk
(exemplified by the "detuning" you mention) is higher for the Lexus driver
than for the Chevy driver. Thus, the Lexus driver will be less apt to switch
in response to the price differential anyway.
Here's something else of note. While the price ratio of premium to regular
has been falling, the price ratio of premium to diesel has remained
relatively constant. This is at least consistent with the premium-regular
substitute argument in that one does not have the option of putting diesel
in a car that takes premium. Hence, we would not expect the premium/diesel
price ratio to fall.
Antony Davies
-----Original Message-----
From: Brian Eggleston [mailto:egglesto@augie.edu]
Sent: Monday, September 12, 2005 8:47 PM
To: antony@antolin-davies.com; tch-econ@elon.edu; dcoffin@iun.edu
Subject: RE: Relative prices of grades of gasoline
With all due rerspect, I seriously question this explanation. "Premium" and
"regular" are simply not good substitutes. Many vehicles (including Audi,
VW, BMW, SAAB) require premium. They will of course run on "regular" but
the "computer" detunes the engine such that performance (including mpg)
suffers. Performance matters to the kind of people inclined to buy the types
of vehicles which require "premium." I know this from personal experience.
There IS a difference in quality.
Brian Eggleston
Associate Professor & Chair
Department of Economics
Augustana College
Sioux Falls, SD 57197
>>> "Antony Davies" <antony@antolin-davies.com> 09/12/05 4:57 PM >>>
I can't speak to the constant 20 cent delta. However, the declining relative
price can be explained via monopolistic competition. As the price of premium
rises, consumers have greater incentive to try the lower-priced competing
brand (i.e. regular gas). [Note: Brand <> "brand name," but "attribute
bundle."] When they do, most find no real difference in quality. Those
consumers never switch back to regular (even when the prices return to their
original levels). The result is a series of declines in demand for premium
accompanied by increases in the demand for regular -- each step in the
series caused by a spike in the price of gas. The long run result is that
the price ratio approaches one.
Antony Davies
-----Original Message-----
From: "Coffin, Donald"<dcoffin@iun.edu>
Sent: 9/12/05 5:41:30 PM
To: "Teaching Econ Discussion List (E-mail)"<tch-econ@elon.edu>
Subject: Relative prices of grades of gasoline
One of the things I've noticed, over the past year-and-a-half or so is
that the price of premium gasoline has declined relative to the price of
regular. At least where I am. (The numbers are sounded.)
Early 2004 Now
Regular $1.80 $3.00
Premium $2.00 $3.20
Rel.P 1.11 1.07
A couple of questions. Is this just a Midwest phenomenon? Does anyone
have a reasonably convincing explanation of the unchanged absolute price
differential (even further in the past, the money prices were about $1
for regular and about $1.20 for premium)? Is there any evidence of a
shift from regular to premium as the relative price of premium has
declined?
It makes for an interesting discussion in class, by the way.
Don Coffin
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