Water & Gas: An American pricing paradox

"Bottled water has gotten people to drink more water," says Ms. Kaminsky.

Overall, sales of bottled water grew 30 percent last year, while carbonated beverage sales grew only 0.6 percent.

The utility of having water in a portable container obviously appeals to consumers. But by giving the bottles an identifiable brand, and pouring into millions of advertising ($85 million in 2001), marketers have turned a home utility into an appendage of daily life.

"A product that was once a commodity is now moving in the direction of being a serious branded consumer product," says John Sicher, editor of Beverage Digest.

Indeed, product loyalty among bottled-water drinkers is very high. About 65 percent have a brand preference. In contrast, "nobody knows what gasoline they put in their car," says Kaminsky. "Gas is gas."

Consumers' allegiance to specific brands of gasoline began to fade during the mid-1970s, when retailers started cutting services in the wake of the nation's energy crisis.

Over time, gasoline vendors struggled to persuade consumers that their brand was any better than – or different from – other retailers' brands.

The upshot: Gasoline retailers can rarely get away with charging high prices.

Regardless of the downshift in service, the market for gasoline was likely to evolve toward flat pricing, experts say. Consumers become savvier about products over time. Gasoline, which Americans have consistently bought for more than a half century, is no different.

New products have the opposite effect. As the market for a new product emerges, people have little knowledge of the relative quality of one brand compared with another. When in doubt, they tend to equate quality with price.

"If consumers have no other way to determine differences in a product, they rely on price for a signal of quality," says Gerry Smith, a marketing professor at Boston College.

Water bottlers are currently reaping the benefits. Because bottled-water drinkers are more sensitive to quality and more affluent than most consumers, they are less likely to flinch at high prices, experts say.

Consumers grouse when overall gasoline prices rise. But they have had little reason to complain in the long term. Adjusted for inflation, a gallon of gasoline cost an average of $1.55 in 1949.

Gasoline sold in the US costs about the same to extract and process as gasoline sold around the world. Because of lower taxes, Americans continue to pay far less.

Federal and state taxes account for about 30 percent of the cost of gasoline. Cities with stiff environmental controls often tack on additional levies. But the chunk that goes to the government is much smaller than in most countries. In Britain, for example, taxes account for about 75 percent of the cost of gasoline. The Mexican government traditionally adds 20 cents to the cost of a gallon each year.

Many of these countries use gasoline taxes to pay for state-run social programs. And their populations, industry officials point out, are generally far less dependent on automobiles to get around.

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