Why is gas so expensive in West Bend?
Zone pricing by oil companies gets some of the blame

By KEN MERRILL - Daily News

Sept. 4, 2015

WEST BEND - The dark side of Garrison Keillor’s Lake Wobegon, “where all the women are strong, all the men are good-looking and all the children are above average,” is a place where all the drivers are terrible, the streets are crumbling underneath and gas prices are higher than anywhere else.

There’s a persistent belief that, on at least the last count, it’s West Bend.

An Aug. 21 story in the Daily News explaining why gas prices are typically higher in West Bend drew pushback from readers.

One reader emailed to say that “One person owns the majority of all the stations and sets the price for all.”

A letter published in the Daily News on Aug. 25 said the story “does not explain why Hartford and Slinger are cheaper,” and, later, “why is the same gas 20 cents cheaper in Kenosha and Milwaukee?”

 Daily News Graphic

According to gasbuddy.com, gas prices in Washington County on Thursday morning were exceptionally uniform. Several West Bend stations were at $2.55 a gallon for unleaded gas, as were stations in Saukville, Port Washington, Germantown and Jackson. Kewaskum was a penny cheaper; Hartford and Slinger were at $2.49. Gas was as expensive as $2.65 at a station in Richfield.

Information from the Wisconsin Department of Agriculture, Trade and Consumer Protection belies the notion that there is a monopoly of ownership among West Bend stations. Of the 15 registered in the city by the state, three are owned by Mad Max Convenience Stores (BP stations at 1211 W. Washington St. and 1229 S. Main St. and a Clark station at 1512 W. Washington St.), two are owned by Wisconsin Retail Property Management (BP at 2825 E. Washington St. and Citgo at 1516 N. Main) and two are owned by Paradise Mart Inc. (Shell stations at 815 W. Paradise Drive and 3100 W. Washington St.). Brothers Steve Yahr and Bob Yahr own Shell stations at 1650 N. Main St. and a Mobil station at 2333 W. Washington, respectively. Owners of the remaining six stations in West Bend have no other stations in the city.

Steve Magestro, co-owner and president of Mad Max Convenience Stores, laughed when it was suggested that there’s a “back-room deal” among station owners to set prices.

“If there is, I’d like to know about it,” Magestro said. “The way we do it is, we go out and do sight surveys at every single one of our locations. We compare what the competition is selling their fuel for.

“We go through the stores in our area and write down their prices for unleaded, mid grade, premium ... so we, in turn, basically can match their price.”

A Mad Max truck sits in the back of a BP Gas Station as the tanks are refilled Thursday afternoon in West Bend.  
Photo by John Ehlke

Pat Osowski, a partner and general manager of Paradise Mart Inc., agreed.

“I’m trying to see what the town does,” Osowski said. “We all kind of sit and wait and pick out who’s going to lead. There is no daily phone call where I figure out the price. A lot of times I lead and sometimes we wait.

“Every morning I look at the prices and have to figure out when we got our load and how much we paid for it. I look at Menomonee Falls and Germantown, Cedarburg to get an idea of where they are. The only people I talk to about gas prices is our dispatchers at our haulers and my father. I bounce ideas off him.”

Larry Gomes, a professor of economics at the University of Wisconsin-Washington County, had a name for what Magestro and Osowski described.

“In economics there is the price leadership model of pricing,” Gomes said. “The stations are looking at each other. If I’m going to reduce prices, the others are going to match, so there’s nothing to gain.

“Maybe they have one or two they look at. They say, that guy, maybe it’s the corner one or one in the middle, when that guy changes, we are going to change.”

If owners don’t conspire to set prices — collusion in the fuel industry is a serious charge, punishable under federal law — why is West Bend often a “bubble” of higher prices?

Nick Jarmusz, public affairs director with AAA Wisconsin, said “prices that retailers charge are really dependent on what they have to pay to supply themselves.

“The Milwaukee area is much more connected to the Chicago market. They are purchasing their gas directly from refineries in the Chicago area because of the pipelines that make it easier for them to do that.”
 

Convenience

Jarmusz said most filling stations make more profit on the convenience store than on the gas.

“The gas really is just to bring people in so they price to ensure they aren’t going to lose money on that but they really make their profit on the convenience store side,” he said.

Another part of the answer may lie in zone pricing, a strategy employed by oil companies to enhance profits by charging dealers different prices for gas based on the number of vehicles, household incomes, population density, the strength of competition and other factors.

A New York law outlawing zone pricing was overturned in court, so while controversial, it’s legal. It can result in gas stations only a few miles apart selling gasoline at significant price differentials. The short answer is “because they can.” Essentially, a more affluent community is subsidizing other areas.

West Bend City Administrator T.J. Justice said as much.

“I don’t pretend to be an authority on this, but I believe West Bend falls in a different distribution area than some communities to our south,” Justice said. “I’ve never verified that but that’s what I’ve been told by some of the providers. There’s distribution zones for fuel no different than there is for other ... whether it’s Coca-Cola or Twinkies or cereal, you have these distribution centers so pricing a lot of times is affected by those businesses supplying the fuel.”

Another factor may be the cost of doing business in West Bend. Gasoline often costs more in wealthier neighborhoods because stations pass along higher real estate costs.

“We keep nicer stores,” Osowski said. “We have store owners who have mortgages who want to pay their mortgages and keep their stations clean."

“You have some station owners who care about their stores."

“It’s true, sometimes we’re the highest, but there are times that we’re lower than the Kwik Trips and we’re lower than Germantown and Menomonee Falls. We only get the feedback when we’re higher.”

Osowski said he tries to clear 10 or 15 cents a gallon.

“On a 10-gallon fillup, I’m making $1.50,” Osowski said. “But if you use a credit card— 80 percent of the people do — they charge 2 percent. So if gas is $4 a gallon, we pay 8 cents, per gallon (for the credit card fee), so now we’re only making 2 cents out of that 10. If gas is $1 a gallon, we’re still paying (a credit card fee of) 2 cents a gallon, so now we’re making 8 cents a gallon.

“We make more money when gas is lower on our credit card charges,” Osowski said. “People are happy and they’re buying more, so trust me, we want lower prices, too.”

Sometimes convenience overrides the economic forces of supply and demand with regard to price.

“It’s a very localized market when it comes to buying gasoline,” Gomes said. “Even if it’s 5 cents or a dime, people won’t bother to drive a mile. Convenience is a big factor. If I’m going to buy 10 gallons, it’s just a dollar or maybe $1.50 (saved), and the cost of my time is higher.”

Reach news editor Ken Merrill at kmerrill@conleynet.com