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UW-Eau Claire students present research on area retail gas prices

December 13, 2012
Students working on Gas price research
Student and faculty researchers review  their study of gas pricing in the Eau Claire market. “I learned a lot about independent problem solving while doing research,” said Emily Anderson (far right), an accounting and business economics major. “I hope it helps people better understand some of the possible reasons why we observe higher gas prices here.” Anderson is shown with (left to right) Dr. Ryan Weichelt; Ben Possi, a geography and economics major; and Dr. Laura Middlesworth.

EAU CLAIRE — Two students from the University of Wisconsin-Eau Claire had the opportunity to present their research before the Eau Claire Fiscal Policy Advisory Committee Dec. 12. Their study provided data to help explain the geographic and economic factors affecting gasoline pricing in the area.

Ben Possi, a senior geography and economics major from Milwaukee, and Emily Anderson, a senior business economics and accounting major from Osseo, researched the Wisconsin Unfair Sales Act (also known as the minimum markup law) and surveyed current pricing in nearby areas, including Eau Claire, Wausau, Stevens Point and Hudson. The students also researched pricing in cities in other states, including Ames, Mason City and Iowa City in Iowa; and St. Cloud, Mankato and Albert Lea in Minnesota.

UW-Eau Claire offers many opportunities for students to collaborate with faculty on researching important issues of the day. After observing much public dialogue about the significant differences in gas prices between Eau Claire and nearby communities, Dr. Ryan Weichelt, assistant professor of geography, approached Dave Duax, a member of the Eau Claire City Council, about the possibility of exploring the issue in depth. The project would give students an important real-world issue to address and a professional forum in which to present findings, and also help educate the public about issues surrounding the price of gas.

"I felt it was a spatial phenomenon and strongly believed geography could offer something to this study," Weichelt said. "I understood geography could only help answer some of the questions so I contacted Dr. Laura Middlesworth for help regarding the economics of this issue."

Weichelt and Middlesworth, assistant professor of economics, worked with a group of four students to apply their understanding of market structure and pricing behavior to the retail gas market. Possi and Anderson took the lead in determining the factors that influence the level of competition among firms in a particular market, and how this level of competition shapes pricing decisions.

In an effort to explain observed patterns in retail gas prices, the students explored the possible connection between state-level legislation and the low level of price dispersion in Eau Claire. The study was conducted over the summer months and results were analyzed throughout the fall semester. Data about wholesale and retail pricing was obtained using the Oil Price Information Service through a grant from UW-Eau Claire's Office of Research and Sponsored Programs and funds from the city of Eau Claire. Margins and weekly averages from April-September 2012 were analyzed, and a sampling of retail prices for every gas station in each city included in the study was collected for a specific two-week period.

According to Weichelt, the results show that the Unfair Sales Act seems to have the greatest impact on prices in the state compared with Iowa and Minnesota, two states which do not have such legislation. The Unfair Sales Act states that gas retailers must charge a price that is a minimum of 6 or 9.18 percent over the cost of the product, depending on how the cost is determined. Furthermore, researchers concluded there is little competition among gas stations in the four Wisconsin cities included in the study. Those cities also have the smallest "seller density," which means the physical location of the stores are the farthest apart. Of all 10 locations surveyed, Eau Claire was calculated to have the smallest seller density and also was the least competitive. Eau Claire and Wausau had the highest overall retail prices.

"The lack of competition, paired with the state-level legislation, creates an environment in which gas retailers in these select Wisconsin cities have the ability to set prices at the levels observed by the public," Middlesworth said.

The results in Minnesota and Iowa were the exact opposite. There was greater seller density and more variation in prices as retailers had to compete with another, thus driving down the prices, Weichelt said. It also was noted that the other states have lower gas taxes than in Wisconsin.

In addition to Anderson's compilation of pricing data and study of the minimum markup law, Possi examined the spatial aspects of this study including city comparisons, seller densities, and pipeline locations.

"There is a lot of misinformation regarding how prices are set," said Weichelt, emphasizing that the possibility of "collusion" among retailers was not an objective of the study nor would it be possible due to legal fees and subpoenas needed for data or evidence.

"Our study does not state direct collusion is occurring. There seems to be an inherent lack of competition in Eau Claire, but it does not appear that business owners are violating the markup law or any other," Weichelt said. "The public can put pressure on policymakers to change the law and on the business leaders to explain their pricing methods, but these are things we cannot prove with this study."



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