Main learning objectives:
How does price affect demand of petrol?
What we're really asking is - what is the price elasticity of demand for gasoline? Is it zero? That is, if gasoline rises 10%, what happens to the quantity demanded for gasoline? We do not have to just theorize about how people may respond to a rise in gas hikes, we can look at studies which determine what the price elasticity of demand for gasoline is.
A meta-analysis by Molly Espey, published in Energy Journal. Espey examined 101 different studies and found that in the short-run (defined as 1 year or less), the average price-elasticity of demand for gasoline is -0.26. That is, a 10% hike in the price of gasoline lowers quantity demanded by 2.6%. In the long-run (defined as longer than 1 year), the price elasticity of demand is -0.58; a 10% hike in gasoline causes quantity demanded to decline by 5.8% in the long run.
Another terrific meta-analysis was conducted by Phil Goodwin, Joyce Dargay and Mark Hanly and given the title Review of Income and Price Elasticities in the Demand for Road Traffic. If you're interested in the subject, it's an absolute must-read. They summarize their findings on the price-elasticity of demand of gasoline as follows:
If the real price of fuel goes, and stays, up by 10%, the result is a dynamic process of adjustment such that:
a) The volume of traffic will go down by roundly 1% within about a year, building up to a reduction of about 3% in the longer run (about five years or so).
b) The volume of fuel consumed will go down by about 2.5% within a year, building up to a reduction of over 6% in the longer run.
The reason why fuel consumed goes down by more than the volume of traffic, is probably because price increases trigger more efficient use of fuel (by a combination of technical improvements to vehicles, more fuel conserving driving styles, and driving in easier traffic conditions). So further consequences of the same price increase are:
c) Efficiency of use of fuel goes up by about 1.5% within a year, and around 4% in the longer run.
d) The total number of vehicles owned goes down by less than 1% in the short run, and 2.5% in the longer run.
The realized elasticities depend on factors such as the timeframe and locations that the study covers.
Another research conducted by Goodwin et. al. find that in the short-run the price elasticity of demand is -0.25, with a standard deviation of 0.15, while the long rise price elasticity of -0.64 has a standard deviation of -0.44.
These days all petrol stations look similar and there is little or no differentiation in terms of products sold, after all they sell the same petrol/diesel at the pretty much same price fixed by the oil marketing company. The only differentiation I can think of is through better customer service by employing courteous and well trained staff (this too is a challenge as the attrition levels are high at the lower end of the skill pyramid).
- Taking up a franchise of some fast food chain, people traveling long distances may stop not only for petrol but also something to eat!
- Have windows signs displaying special offers. (free windshield wash/ coffee)
- Give free specials. (free car wash/ windshield wash/ toilet paper)
- Create Your Own Loyalty Program- membership discount, small rewards
- Create your own website- establish a web presence. This gives your customers a portal they can go to if they want to get updates about your latest product offerings and services. To make your website effective in getting customers and garnering attention online, make sure to submit them to niche sites and specialized link directories. These directories not only increase web traffic, they also help improve link popularity as well.
- Use social media
- Take advantage of E-mail marketing
- Interact With Your Customers Online by Blogging
How does price war affect the company and the customers?
（Source: The pros and cons of price wars Price Wars, Part 2: 5 Reasons Price Wars Are A Bad Idea & 5 Steps You Can Take To Avoid Them)
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