Tuesday, June 06, 2006

Self-Service Gas Stations

Last night on "The Daily Show", Ed Helms had a brilliant piece on New Jersey's self-service law (The link goes to the Daily Show website, however, last night's videos have not been posted yet). New Jersey and Oregon are the only two states in the country which prohibit people from pumping their own gas. These laws were initially passed out of concerns for public safety. E.g., members of the general public might decide to have a gasoline fight and then light a cigarette blowing themselves and everyone nearby up; professionals are less likely to make this mistake. Billions of transactions at self-service stations across the world, however, seem to indicate that freak gasoline fight accidents (and similar catastrophes) are quite rare. Thus, these laws do not seem necessary.

Yet I, and most Oregonians I know, like the self-service law. Most of my economist friends, however, flip out at the mention of this law (except the one who moved to New Jersey and quickly did a 180 on this topic). Restricting choice is bad. How dare Oregon and New Jersey force people to pay higher gas prices for no good reason! If people prefer full-service let them pay for it.

Typically, I would say their logic is fine; however, observation indicates that full service is extremely hard to find in states which allow self-service. I asked a friend of mine who does accounting for a company that runs 40 or so gas stations in Oregon how much the self-service law adds to the price of gas in Oregon. At the stations run by his employer, he estimates that it adds 1 to 2 cents per gallon (depending on how busy the station is). I find it very hard to believe that there are not enough customers to support more full service options. Are most people really unwilling to pay 15 cents to avoid getting out of their car (particularly when it is hot, cold, raining, etc) and getting their hands dirty?

But if people are willing to pay for the service, why don’t more entrepreneurs provide the service? If there really is enough demand for full service to cover the costs, it only makes sense to not offer full service if the proprietor can make more money by not offering it. How would this happen?

It happens because (until recently with the introduction of credit card machines in gas pumps) people at self-service stations had to get out of their cars and go pay an attendant. This allowed the station proprietor to sell them other stuff at the same time. Given the high profit margins on impulse/convenience purchases, it only takes a small fraction of people succumbing to the allure of convenient sugar, fat, nicotine, and gambling to make it worthwhile to force everyone to get out of their cars. Thus, in the absence of a self-service law, full service disappears because the profits from the combination of self-service and convenience purchases dwarf the profit from providing full-service at a price most people are willing to pay.

The evidence suggests this is likely correct. At gas stations with convenience stores, gasoline sales account for only 54 percent of revenues, so it seems very plausible that stations make a lot of money by forcing people to get out of their cars. Further, New Jersey and Oregon (where most people don't have to get out of their cars to buy gas) have the lowest percentages of gas stations with convenience stores (18 and 30 percent respectively, compared to the US average of 62 percent). (1997 Economic Census).

In light of this, the welfare consequences of the law are not as straightforward as my economist friends argued. In the absence of the self-service law two types of people are worse off. First, those who would be willing to purchase full service at MC (or close to it) no longer have this option. Second, people with self-control problems are now faced with an additional temptation to buy stuff that they prefer not to buy. The losses to these individuals need to be weighed against the gains to those who prefer self-service. While I don’t know if the gains from the law outweigh the losses (or if there is some alternative which would improve welfare for all groups -- e.g., mandate the stations of certain size provide full service or subsidize full service), the debate is not nearly as simply or as obvious as my economist friends argued.

A couple of thoughts:

1. If lots of people really liked full-service, then even in states that don't have full-service laws, why wouldn't some gas stations specialize in full service, especially in areas (e.g., downtown) with lots of gas stations.

2. Do people feel obligated to tip at full-service gas stations? If so, then the cost is actually higher.

3. I remember one gas station in Cambridge that had one full service tank, and the rest were self-service. It seems like if we want to mandate something (and I'm not totally convinced, but I appreciate your argument) mandating something like that would ensure the most freedom.

But I'm still not clear on why, if some people like full-service, we don't have more specialized gas stations. I agree that sometimes full service is nice: let someone else check your oil, see if your tires are full, whatever.

I'm totally confused. How did you get those calculations from those data sources? I don't see the data there at all. I know I'm dumb, so please explain....

PS Other readers: see how bent out of shape Bryce's economist friends are getting?

1. Some places do offer this service, but you tend to only find these options where the station can make a large profit by offering the full service option. I can think of three places were this is likely to occur: 1) where the real estate prices surrounding existing gas stations made it hard to add a convenience store; 2) where people don't buy stuff at convenience stores; and 3) where firms can charge a lot more to provide full-service than it costs to provide (i.e., where they can make more profits then they do off the convenience store for a large proportion of customers).

2. Maybe in other states, but definitely not in Oregon and NJ.

The point is simply that the firms make more money by not offering it (and getting people out of their cars to buy drinks and snacks) then they can make by offering it. So no one (or very few people) choose to supply this service.


Click on the economic census link. Click the more arrows under industry detail for whatever you are interested (e.g., gas stations with convenience stores) in the NACIS heirarchy section. There will be a table with each state in there. To get the fraction of gas stations with convenience stores take the number of establishments with convienience stores (e.g., in NJ this is 551) and divide this by the total number of establishments (again, in NJ this is 3155, so the fraction is 17.5%). The numbers may be slightly off, I did them 2 years ago (and sent them to you in a email). I only double checked quickly that these were the same data I used then.
Further if you are interested in where the 1 to 2 cent figure comes from, here is the rough calculation for the 40 or so stations my friend had data for:

depending on the size of the station, their labor costs increase between $500-$1500 per month. (Here, we assume that the firm keeps only one employee per station per shift in the absence of the law.) Across the 40 stations, they average 100,000 gallons per month(again with a fair amount of variance). So the expected savings per gallon would appear to be somewhere in the 1 to 2 cent range.

I still can't figure out the fraction of revenues from gasoline though. Is that based on gas revenues per station in non-convenience store gas stations? Or is the actual breakdown there somewhere I don't see.

And I add my counter-post, of course....
The 52 percent number comes from someone else. Click the 52 percent of revenue link, and that takes you to someone else's summary of the industry. It is in there somewhere (down a little ways).
Wow, I read that like 10 times looking for that number and didn't see it. Of course, once I searched for 52, it came up right away. Fortunately, I prefaced my questions with "I know I'm dumb."
Okay, if gas stations can always make more money with a convenience store (which has to be the case for them to - essentially - always choose those over offering full-service), then isn't that because consumers aren't willing to pay for full-service.

It seems like if you'd only end up in a situation with convenience stores despite people's desires for full-service IF there were so few of those people that it didn't justify the fixed cost of entering the full-service market.
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