'Protecting consumers' by raising gas prices?

Under "zone pricing," gasoline distributors charge different wholesale prices--known in industry parlance as the Dealer Tank Wagon (DTW) price--to service stations in different areas. Legislators in Connecticut and some other states have criticized

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We have examined Connecticut DTW prices and found that price differences are closely related to demand (as measured by income) and supply (as measured by the number of residents per station). Given this finding and previous research into zone pricing, we conclude that a Connecticut ban on zone pricing would likely result in higher prices at the pump for the majority of the state and no drop in pump prices for the remaining areas. Lawmakers in Hartford and other state capitals should take note of this finding.

ANALYSIS As Econ 101 students know, prices will differ across markets to the degree that goods are imperfect substitutes and transportation costs are present. That is, the price of potato chips will be restrained by the price of corn chips and popcorn and the ease with which consumers can switch from one snack to another if the price of potato chips were suddenly to skyrocket. Beyond that, prices will be determined by supply and demand within each market.

As a measure of supply, we use the number of residents per gas station in Connecticut's various postal zones, which we identify using the last three digits of their ZIP codes. This measure, while imperfect, well captures the dimension of market supply that, in addition to quantity, is relevant for price determination: the number of suppliers and thus the degree of competition. In Figure 1, gray represents a high resident-per-station ratio (i.e., low competition) area and blue the opposite. Clearly, Fairfield County and the Hartford area have the least competition in Connecticut, while the Norwich/New London area is the most competitive.

[FIGURE 1 OMITTED]

We use average incomes as a measure of demand. In Figure 2, gray indicates the highest income areas and blue the lowest. The highest incomes in Connecticut are in Fairfield County and the lowest are in the Hartford area.

[FIGURE 2 OMITTED]

Basic theory predicts that gasoline prices should be highest in Fairfield County where supply is low and demand high. Prices in the Hartford area are indeterminate because of opposing forces--low relative supply, but also low relative demand. The remaining areas (most of the state) should have lower prices than Fairfield Country.