This phenomenon is no more surprising than the fact no one ever gets a
second opinion when a doctor delivers good news.

____________________________

Barry E. Adler
Charles Seligson Professor of Law
New York University School of Law
40 Washington Square South, #314-I
New York, NY 10012

Phone: (212) 998-6660
Fax: (646) 349-1747
email: barry.adler@...


-----Original Message-----
From: ECONLAW-L [mailto:ECONLAW-L@...] On Behalf Of Howard P.
Marvel
Sent: Friday, April 02, 2004 12:41 PM
To: ECONLAW-L@...
Subject: Re: Gas

The puzzle isn't new, and it is perhaps stranger than you imagine. When
prices are rising, people's view of prices adjusts more slowly. Rising
prices trigger more search, because now people think they can get a better
deal elsewhere, due to sticky expectations. The result is the one that Bruce
Johnson suggests -- the price distribution narrows. People are searching
more when search provides fewer benefits. When prices fall, people don't
wise up and search, so the distribution of prices expands. The "stranger"
part is that the pattern repeats itself annually when we hit the summer
driving season -- it is easier to understand people getting taken in by a
surprise price shock. The result is that prices rise rapidly as demand
increases, and then slouch back down, as retailers are slow to pass on
wholesale price cuts, since their benefit from doing so is limited by the
absence of search.

This odd pattern is documented and analyzed by Matt Lewis, at Berkeley.

Howard P. Marvel
Professor of Economics & Law
The Ohio State University

-----Original Message-----
From: ECONLAW-L [mailto:ECONLAW-L@...] On Behalf Of Todd Zywicki
Sent: Friday, April 02, 2004 12:07 PM
To: ECONLAW-L@...
Subject: Gas

An article in the Washington Post yesterday indicates that in response to
increased gas prices, consumers are willing to drive further to buy cheaper
gas (say, from Arlington out to the suburbs). Although gas prices have
risen, from say $1.60 per gallon to $1.80 per gallon, there is no indication
that the difference in price between Arlington and the suburbs has changed.
Assume that the price spread is still the same--say, 9 cents
difference--between Arlington and the suburbs. Why would consumers be
willing to make a drive that they were not willing to make when the total
price was lower, but the marginal difference in price was identical? The
marginal benefit and marginal cost of traveling further for gas is still the
same regardless of the overall cost. It is still the same marginal travel
time to save the same marginal amount.

-TZ

Todd J. Zywicki
Professor of Law (On Leave)
George Mason University School of Law
Research Fellow, James Buchanan Center
Program on Philosophy, Politics, and Economics