My father says that over holidays (like Christmas, New Years, etc.)
the
price at all the gas stations in his area go up 20 cents per gallon.
Could this be anything other than coordinated monopoly pricing?
Obviously, if the demand curve shifts up, the market price will go up.
But that's because suppliers will increase supply in ways that
increases
their marginal cost. If the demand curve shift is known to be
temporary, suppliers won't change their long-term behavior, so
marginal
cost should remain unchanged. And if that's the case, wouldn't
competition among outlets keep prices at marginal cost -- such that
prices wouldn't change over the holidays?
An idle question that came up over the Christmas family gettogether --
Good question. I could have used it on my I.O. exam. Here are my thoughts.
(1) The relevant marginal cost is not the long-run marginal cost, but the short-run one-- what is the cost of supplying one extra gallon of gasoline on December 25? If labor costs double on Christmas day, that is going to raise the price on Christmas day, even if the demand curve is unchanged.
(2) If demand shifted out on Christmas day, then, as you note, the marginal cost would increase for reasons independent of it being a holiday. The gas station would have to make a special order perhaps, or cram its storage tanks fuller than they ought to be.
Or, a slightly different explanation: many or all gas stations would hit their short-run capacity. Then the marginal cost goes vertical, and price would rise.
(3) It is also possible-- even likely-- that the demand curve shifts IN on Christmas day. If the marginal cost increases, prices can still rise.
(4) If point (3) is true, so demand does shift in, and costs are unchanged, then if gas stations are colluding, the price should FALL on Christmas Day, not rise. This is evidence against the collusion theory, I think.
(5) A slightly tangential point is that the relevant demand curve is the short-run demand curve, not the long-run one. If consumers know the price is higher on Christmas Day than on the 26th, many of them will shift their purchases to the 26th. If, however, prices are higher for all of December, then a higher price won't reduce demand as much on any given day.
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