Gas pricing game costs consumers millions
Benjamin Franklin said, “A penny saved is a penny earned.” These days of high inflation and literally pennies earned on our bank accounts makes a penny more important than ever.
Recently, gasoline prices have been on the downtrend. That is good news for all of us and for the economy. Let’s discuss the economics and psychology behind how gas prices are quoted. I am sure you have all noticed that they are quoted to a tenth of a cent, in other words, $3.70.9. Now, is that $3.70 or $3.71? I can almost guarantee that we say $3.70, even though we end up paying $3.71, because there is no such thing as a ninth of a cent. It is simply rounded up, and rounding up adds up to millions of dollars.
Is there anything anywhere that costs a penny anymore? Perhaps only the kiddie pony ride at Meijer — surprisingly that is only a penny. How many of us see pennies on the ground and do not pick them up? What would happen if you buy a gallon of gas for $3.99.9 and only have $3.99 in cash? Will you be forgiven that penny?
The practice of setting prices ending in 99 cents, known as "just-below pricing," is a common marketing tool used to make consumers feel like they're getting a deal, said Robert Schindler, a professor of marketing at the Rutgers School of Business-Camden who researches retail prices and how shoppers process numbers. It is a psychological tool that is very effective, as consumers actually feel they are not paying that full dollar for the item. "To consumers, a price such as 19.9 cents feels substantially lower than the price of 20 cents," Schindler said. While just below pricing is practiced by all industries, only the gasoline industry prices their product in fractions of a cent. It works psychologically and brings in millions for them.
Now, how the heck did this practice begin? According to an article by Nathaniel Meyersohn and Chris Isidore of CNN Business, there is a long history and subtle marketing strategy behind this practice. They quote Ed Jacobson, a former gas station owner from Three Lakes, Wisconsin. “Fractional prices first appeared in the early 20th century as states began implementing sales taxes on gas to help build and maintain highways. At the time, the taxes were levied in tenths of a cent and gas stations passed them on directly to drivers.”
But why not just charge a full cent? Well, at that time, the average cost of gas was around 10 cents a gallon, so adding a cent was a big deal, especially for drivers strapped for cash during the Great Depression. Instead of rounding up, which would have equated to a 10% increase, gas stations added the fraction of a cent instead.
By the 1950s, as the interstate highway system developed and gas stations began advertising their prices on big boards, most stations had moved to ending prices in 9/10 of a cent, rather than a smaller fraction. This was a way to maximize sales, said Jacobson.
There have been occasional attempts to end fractional pricing for gas. For example, in 1985, Iowa outlawed the practice. "We don't have a one-tenth of a coin," an Iowa state senator reportedly said at the time. "It just bugged me for years." In 1989, however, the state repealed the law and most stations returned to fractional pricing.
As much as I have tried to break the habit of reading $3.99.9 as $3.99, it is just hard to do. To a frugal economist like me, that extra penny counts, but the psychology is so powerful that it works. We are all used to it now, but a penny for us is millions for them. The sad fact is that, fractional pricing or not, we would buy gasoline anyway because it is a necessity which many of us cannot do without. The consumer again loses, but it’s just a penny times 135 billion gallons a year. You figure it out.
Kojo Quartey is president of Monroe County Community College and an economist. He may be reached at kquartey@monroeccc.edu.
This article originally appeared on The Monroe News: Kojo Quartey: Gas pricing game costs consumers millions
