It is often argued that gas stations operate inefficiently because they have "excess capacity" in the form of more pumping stations than they would otherwise need if they were operating under conditions of perfect competition

Question

However, can you think of any reason why a gas station franchise owner would wish to install more pumps than he knows will rarely if ever be fully utilized at any one time? Can you explain the economic logic of this "apparent" wastefulness?

Answer 1

One thing that gas station owners are keenly aware of is the convenience of their business, that is the ability to pump gas and go. By installing fewer pumps they might run the risk that customers will pull up to the station when all the pumps are fully occupied. This may result in customers simply looking elsewhere. Since gas stations are typically located either across the street from each other or next door this is really a form of product differentiation that not only increases the profits of the gas station owner but provides real benefits to consumers as well.