Gas prices not rounded to nearest cent

Question: Why do gas prices end in .9? Why isn’t the cost rounded either up or down a penny? And, when did this pricing practice begin?

Answer: Your answer comes from Cathy Landry, media representative, American Petroleum Institute:

That question is one that comes up from time to time, and we’ve tried to research how retail pricing to the 10th of a cent began. API is not an expert in retail marketing strategy, and we’ve not been able to find any specific information to answer this question. But we can offer a bit of background. The competitive nature of marketing, particularly in retail gasoline marketing which is one of the most highly competitive markets of any kind, is likely a key factor.

According to a book published in 1966 by Harold M. Fleming, entitled “Gasoline Prices and Competition,” “on the large volumes of gasoline sold by wholesalers and retailers, even the smallest per gallon reduction in expenses is of major importance.” Fleming states, “in such a bulk business as gasoline, a few mills (a mill is one tenth of a cent) mean a lot to everybody–suppliers, jobbers, dealers and independent marketers.” Another factor in this type of retail pricing may have been the 1933 increase of the federal gasoline tax from one cent per gallon to one and a half cents per gallon. That half cent per gallon could have encouraged the retail price competition that included pricing down to the mills or tenths of a cent.

Demand today, of course, is much higher than it was in 1966, making Mr. Fleming’s statement an even stronger point today. There are nearly 170,000 retail gasoline outlets in the U.S., most of which are independent businesses. Because retail gasoline marketing is a highly competitive business, wherever a marketer can cut costs to offer a savings to customers, in order to compete for their business, it is only prudent to do that. Therefore, competition in this high volume business is one factor that likely led to this pricing structure for gasoline which has continued decades later.

We have also been asked why the price isn’t rounded off. That’s a retail marketing decision for each marketer. But competition at the retail level seems to keep that from happening. Economically, because this is a high volume market, rounding off the price in either direction could have a huge impact on wholesalers, retailers, and likely even tax revenues. I hope this offers at least a little perspective. The pricing strategy is not different than pricing of any other commodity that we buy at our local grocery stores.

Linda Niemi