When I was a kid, gasoline typically sold for about 33 cents a gallon. Some stations charged 32 cents, others 34 cents, but the variation (over time and geography) was relatively small.
When I moved to Orange County, I was surprised at the amount of variation in prices. It is not uncommon for gas prices to differ by as much as 50 cents and even 75 cents between two dealerships that are only a few miles apart. Even in percentage terms, the dispersion of prices is much greater than we saw in the 1960s.
During a recent visit to Tanzania, I observed the opposite pattern: a very high level of price uniformity. Almost all stations charge about Shs 3,100 per liter, with small price fluctuations. So what explains these differences in price dispersion?
You might think that the difference in price reflects a difference in cost. Perhaps some gas stations in Orange County purchased their gasoline loads at a higher price than neighboring stations. But that alone is not a complete explanation. One might expect consumers to resist paying higher fares at one station than at another, even if the cost standards were different. Most consumers don't care how much the gas station pays the wholesaler. They just want to buy the product at the lowest possible price.
Rather, I think that differences in income explain changes in price dispersion. Because Orange County is relatively affluent, consumers don't want to spend a lot of time driving around looking for the best deal. Because the opportunity cost of time is high, the gas station has slightly more market power than in a completely frictionless market. Incomes are so low in Tanzania that if a gas station charges even 1 percent more than its competitors, it will lose customers.
Of course, this is just an anecdote. However, I observe the same pattern in China, where there is less dispersion in prices for a wide range of goods compared to the US.