Econ IA-Supply and Demand Essay

Australia’s competition regulator says the biggest oil companies are coordinating petrol prices, but has stopped short of calling it price-fixing.The Australian Competition and Consumer Commission (ACCC) found that Wednesday was the cheapest day to buy petrol and Thursday and Friday were the most expensive days.The ACCC has handed a report on price coordination between petrol companies to the Consumer Affairs and Small Business Minister, Craig Emerson.Petrol commissioner Joe Dimasi says the big three – Caltex, BP and Mobil – lead the price hike every time.”What we’re saying is that through the cycle, and we’ve looked at the cycle very closely, we observed that the price in the price hike part of the cycle, which occurs from Wednesday night right through Thursday, that the three refiner retailers – that’s Caltex, BP and Mobil – are the people that lead up the price all the time,” he said.

“In the discounting phase we see retailers like Woolworths, 7-Eleven, United and many of the other independents who are driving the discount down through the entrenched cycle.”They see what each is doing and they have this [Informed Sources] website where they exchange information.”We believe that that is what we’ve described as coordinated conduct. It’s not collusion as described in the act, so we’re not saying it’s a breach of the act.

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“But nevertheless it’s an issue that for us causes some concerns and we’ve raised that issue with the Government.”Mr Dimasi is concerned actions taken by the companies could hurt consumers.”It’s people who have an established pattern of behaviour who know pretty much how the others will respond,” he said.”Through the high visibility of prices through this website – and they could do it through other activities as well – it means that the competitive process is less effective than it could be potentially, and so that’s why it needs to be addressed.”Mr Dimasi says the Informed Sources website is not illegal, but it does foster anti-competitive behaviour.

“There is no suggestion the site is illegal. We examined this issue during the petrol inquiry and we examined it closely during the proposed merger between Caltex and Mobil,” he said.”Nevertheless we are concerned by coordinated conduct.It (the website) does risk the possibility of less competitive outcomes for consumers and that’s why we’ve raised it as an issue of concern.”The article shows the principles of oligopoly.

Oligopoly occurs when only a few firms share a large proportion of, and thus dominate, the industry. Some oligopolistic industries may produce identical products such as petrol; some may produce highly differentiated products such as cars; some may produce only differentiated products such as shampoo. Also, oligopoly tends to have a rigid price. Prices in oligopoly tend to change much less than a more competitive market.The two key features of oligopoly are barriers to entry and interdependence of the firms. This means each firm is mutually dependent and so is affected by its rivals’ actions. For example, if one firm raises or lower the price, the sales of other firms will be affected. Therefore, the interdependence of firms may make them want to collude.

If they can make a deal together and act as a monopoly, when only one firm dominates the industry, they could maximize industry profits. Sometimes, however, they may want to compete with their rivals to gain a bigger share of industry profits for themselves.In this case, Caltex, BP and Mobil are trying to “coordinate conduct” in order to maximize industry profits. According to the article, they “lead up the price all the time”, “exchange information” through the website and what they are doing is “foster[ing] anti-competitive behavior”.

This is clearly a collusive oligopoly for petrol market in the US. This can be show in a graph:As the graph shown, the firms are earning abnormal profits. They produce at MC=MR, the profit-maximizing point and charge price higher than their average cost curve.

A collusive oligopoly happens when firms under oligopoly engage in collusion, they may agree on prices or market shares. Formal collusion is when firms openly agree on the price that they will all charge. Tacit collusion is when firms charge the same prices without any cartel. For example, a firm may charge the same price as another by looking at the prices of the price leader of the industry or its main rivals. In that case, it is unnecessary to communicate to be able to charge at the same price.In this case, Caltex, BP and Mobil might not have a cartel, but they did informally limit competition between themselves. “They see what each is doing” and “high visibility of prices” through the website are evidences for their collusion.

Furthermore, as the article mentioned, the “Informed Sources website” does “foster anti-competitive behavior”. Although it is not illegal, it is harmful for consumers. If the firms are anti-competitive, the prices will be held high.

Also, if all the firms charge at the same price, the firms who are producing at higher production costs will lower their products’ quality in order to decrease their production costs.In this case, the government needs to take some actions in order to break the collusive oligopoly from “lead the price hike every time”. They may produce the products themselves, so they can increase the supply and so decrease the quantity demand curve for the collusive oligopoly. But this may costs a lot for the government, eventually affects the tax that people pays. So it might not be the best way to solve the problem.

The government also may import petrol from other country to compete with Caltex, BP and Mobil. So the consumer will have more choices from other countries and moreover, the price will not be held too high all the time. However, the disadvantage for this solution is that it will lower domestic market’s profit. And this will cause the US petrol firms can’t do more research and development on their products.As the graph shown, if the government successfully solves the problem of collusive oligopoly, the demand will become a kinked demand curve. The demand is relatively elastic at higher prices, because if the firm raises its prices, no one will follow. The demand is relatively inelastic at lower prices, because if the firm reduces price, rivals are forced to lower theirs.

In brief, the best solution for the government is to import petrol from other countries because the domestic petrol market is colluding to earn abnormal profits, which is not fair to other firms and consumers. Also, this action would increase supply and change the current market situation to a competitive one. Moreover, the price would be more stable and consumers would have more choices to purchases.


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