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Strategy in a Two-Station Gas War

  • This is a suggested strategy if you are caught in a classical two-station gas war. After reading what I have to say, please register whether you agree or disagree below.

    Consider the following situation:
    1. 1. Several subdivisions are served by two similar service stations, the Blue Station and the Gold Station.
    2. 2. Unless the prices are ridiculous, everyone is going to buy gas from either the Blue Station or the Gold Station.
    3. 3. Both the Blue Station and the Gold Station sell 100,000 gallons per month at a 10-cent pool margin [profit per gallon of gasoline].

    It starts:
    1. Gold Station drops his gasoline price by 5 cents.
    2. Gold Station immediately looses $5,000 [100,000 gallons @ 5 CPG [cents per gallon].
    3. But Gold Station picks up 20,000 gallons from Blue Station.
    4. So, Gold Station gains $1,000 [20,000 more gallons @ 5 CPG profit he is still making.]
    5. So Gold Station ends up with a net loss of $4,000 [$5,000 loss by dropping to 5 CPG, $1,000 gain in new sales.]
    6. Meanwhile, Blue Station looses $2,000 [20,000 gallons lost to Gold Station @ higher 10 CPG.]

    Blue Station's Choices:
    1. Blue Station can drop his price to even lower than Gold Station.
    2. The process continues until a new balance is met.
    3. Both stations are much worse off at the new status-quo.

    4. Blue Station can match Gold Station's price.
    5. Gold Station can stay, drop his price again, or raise his price to the previous level.
    6. If he stays, both stations loose about $5,000 each.
    7. If he drops, the process continues until an unfavorable balance is met.
    8. He might go back to the former price. The probability of that is only 1 in 3, not good odds for you.
    9. Besides, he's already earned a "stupid card" for starting a loser-loser gas war in the first place.

    10. Blue Station can decide to do nothing.
    11. By doing nothing, Blue Station continues to loose $2,000 per month.
    12. And Gold Station continues to loose $5,000 per month.
    13. Doing nothing is Blue Station's best strategy.
  • What do you think?
    Yes, I agree.
    No, I disagree.
    If you disagree, please send me your reasoning. Thanks.

    Copyright © - 2002 Dutch Hawkins Mandeville, LA USA - All Rights Reserved

    July 11, 2002