Gary’s Q&A

Listener question & Gary’s response · Transcript passage

Gabriel Cervantes asks, Why is gasoline in the USA priced to the 9/10 cent?

This is a very good question, as nothing else in the economy is regularly priced at a fraction of a cent.

This actually goes back to a law passed in 1932 in the midst of the Great Depression. At the time, the average price for a gallon of gasoline was approximately 18 cents.

Gas stations, rather than rounding up, began adjusting prices in fractions of a cent to stay competitive.

The law was supposed to expire in 1934, but instead, it was extended, and the tax increased. Gas stations began adding the 9/10 to the price per gallon and it became the norm.

This was mainly due to a psychological condition known as the Charm pricing effect. For example, consumers perceive $3.499 as $3.49 rather than rounding up to $3.50.

The practice became an industry standard, and any station choosing to round up might lose customers, especially in the 1930s when that 9/10th of a cent might have amounted to 5% of the total price.

The effect of 9/10th of a cent has become smaller and smaller as gas prices have risen, but stations keep doing it because every little bit helps, especially given the low margins in selling gasoline.