Why Do Gas Stations Operate In A Perfectly Competitive Market?

i. These two gas stations operate in a perfectly competitive market. In a perfectly competitive market, there are many buyers and sellers, so all sellers supply the same identical products. The equilibrium price, which is the price charged to customers is determined at the equilibrium point between the world market demand and the world market supply. The marginal revenue from a gallon of gasoline is determined by the market price of a gallon of gasoline and the amount of gasoline that maximizes the gas stations profit. Many gas stations have different gas prices because majority of them charge their customers on what it will cost them to replace the gas. As a result, when the gasoline producers (Hess Corp, Marathon Petroleum Corp, ExxonMobil, etc.) increase the cost that it charges the oil branded retail outlets (Shell Oil, BP America, and so forth), the gas stations will eventually raise its prices proportionally.

i. The elasticity of demand that each of these gas stations faces is very high. For example, when one gas station raises its price by few cents, it will lose many customers to its competitor’s right down the road. Moreover, if the gas stations decide to lowers its price, it will gain back many of their customers from its competitor.

i.

These gas stations have so little control over the price of the gasoline it sells because these gas stations face a large amount of competition, not only from each other but also from other gas stations nearby. For example, if a gas station raises its price, it is bound to lose a broad number of customers so as a result many gas stations are severely limited in raising its prices. In addition, one interesting point is that the gas stations can sell gas at the market price and are not required to lower their prices but if they choose to lower its prices by 1 or 2 cents due to heavy competition, they are bound to increase their sales