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elfsImagine that you own a storage tank full of gasoline that is currently worth $2 a gallon at wholesale prices. It is widely believed, however, that the price of gasoline will be $2.10 next week. You would be crazy to sell your gasoline now: just wait a few days and the higher price will be yours. But if everyone waits a few days, there is no gasoline to be sold now and the resulting shortage pushes the price of gasoline up. How high does it have to go? The answer is $2.10 a gallon. That is the price necessary to induce those who have gasoline to sell it now rather than to wait till next week.The Rapidly Changing Signs at the Gas Station Show Markets at Work
This argument does not depend on whether you think the gasoline market is a paragon of perfect competition or an evil oligopoly. All it requires is that you believe that people who own gasoline, like just about everybody with something to sell, prefer to receive a higher price rather than a lower price. Even if the price of gasoline were set by a perfectly benevolent conservationist, we would expect to see the same pattern of price movements
[Edit: It occurs to me that Varian is wrong in his second paragraph: it is not true that people prefer to receive a higher price than a lower price per unit sold. What entrepeneurs are trying to hit is that sweet spot where the price X unit brings the greatest margin of operation. If Varian were correct, the price would never come down.]
Unfortunately, Varian's article doesn't address the counterpoint: why do gasoline prices fall so slowly? Gasoline prices at the pump are a combination of three factors: the wholesale price of gasoline, plus the minimum markup needed to sustain the business, plus whatever the seller can get out of the buyer. Having discovered that they can sell gasoline for $2.10 a gallon, why should the price come down? Because the neighboring station, in the hopes of increasing his profit, lowers the price a penny: there's then a slow race to eliminate the third factor of the price differential, both of them hating the other for it.
I'm not sure I buy Von Mises's assertion that even if we allowed the gas sellers to cartelize on setting a price, there would be cheating that would still force the slow race to the bottom. The premise of this assertion is that if a dozen sellers set the price at $2.10, and one cheats and sets it at $2.08 the rest would have to drop to that price or suffer a customer differential, and all that's necessary to ensure that the cartel is ineffective is to prevent the 11 cartel members from somehow influencing the cheater with initiatory violence.
