Friday Fun Question

Most Fridays, I will answer a question or questions from Principles of Marketing students about marketing. This week’s question: Why do gas prices end in a fraction?

Good question with mixed answers. The U.S. Energy Information Association provides no reason for this practice.

The pricing of gasoline and diesel fuel at retail service stations to 9 tenths of a cent is most likely a marketing practice. It is similar to other retail pricing of a product at $19.99 rather than $20. EIA does not have information on the origin of this practice.

This answer struggles to pass the smell test. If this reason existed, then why bother with the fraction. While consumers do round down based on the number to the left of the digit, consumers do not round down (or up) based on the digits to the right of the decimal point. That is, consumers will perceived the price of a widget at $7 regardless if the price per unit is $7.99 or $7.19.

Marketplace provides a response that passes the smell test. The answer lies in federal, state, and local tax rates at a time when the price for a gallon of gasoline was pennies.

We have to go way back to when the oil companies were selling gas for, let’s say, 15 cents, and then the state and federal boards decided they wanted a piece of that to keep the roads going, so they added 3/10 of a cent. And the oil companies said, ‘Well, we’re not going to eat that,’ so they passed that on to the public.

This response seems more likely because rates for electricity, water, and/or sewage are often calculated to the second or third decimal place.

The tax man collects his by the fraction.