In today’s current affairs, there are many industries which match the oligopoly market structure. The one which I intend to conduct research on is the automotive fuel (petrol) industry. The petrol industry conforms to an oligopolistic market structure where there are only a few dominating organisations within the industry sector. (economicshelp, 2019) With that being said, there are also a number of brands that don’t have as much influence and shares within the market who just compete against themselves. In essence, this gives the major brands such as shell the biggest influence over price and other aspects of the market. This is called strategic interdependence which means if one firm alters their price, then firms who are in competition with them will also change their price. The reason behind this is that the firms have to keep in line with their competition so that customers don’t choose other petrol stations to get their fuel from.
Within an oligopoly there has to be a five firm concentration ratio of more than 50% which means that the five biggest firms in the industry have more than 50% of the total market share. Within the UK petrol retailing industry, the key players include: Tesco, BP, Shell, Esso and Sainsburys. As you can see from the graph below, the five key players that I have just listed all add up to 66% meaning the concentration ratio is more than 50. Making it fit for an oligopolistic structure.
From the Pie Chart, it’s clear that Tesco dominated the market in 2017, with the most fuel sold in the many stations they have in the country. Quickly followed by BP and Shell who hold high value in the market and create lots of competition. A main reason why these brands are doing so well within the business is due to their low-cost prices, they offer better deals for people in regard to fuel so then they become attractive to people. This means that they increase on supply and demand generating the most profit. For example, Tesco has a number of fuel stations all over the UK selling fuel at better prices than most places. This is because supermarkets mainly buy their fuel from the main producers such as BP & Shell. This means that although they have smaller prices, they get more customers using their petrol and as a chain they generate more money than petrol station such as Jet and Apple green who are independent brands. As a result, the equilibrium on the price/demand curve will be generally in the middle. This is because as they have low prices, they demand is high due to the fact that people are more attracted to lower priced substitutes. This has been proven true in the number of sales each station generates, take a look at the graph below to see the staticsics.
(statista, Motor fuel market share , 2017)
Entering the UK petrol market is proven to be quite tricky as there are high entry barriers. One idea to think about is economies of scale which basically refers to the ‘decline in the unit cost of a product as the absolute volume per period increases. (marsdd, 2019) If your firm has economies of scale, you are at a cost advantage as the cost per output is decreasing whilst the sale increases due to the fix costs being spread over a larger number of output. Generally, economies of scale are generated through bulk buying from suppliers with long term contracts. In relation to the petrol industry, a new firm wanting to enter this market should struggle to find a supplier who has prices in line with how much they want to invest. Not only this, but they will be at a competitive disadvantage as they won’t be able to buy in bulk for lower prices straight away due to them having no relationships with suppliers and the fact oil is a resource which is extracted which is an expensive process. This means that the firm wanting to enter will have to pay a substantial amount at first if they want to benefit in the long run. It’s also worth mentioning a large percentage of the price of petrol is made up of government taxes
Another barrier to entry is local/national government policies. For example, local and foreign governments force companies within the industry to closely comply with environmental regulations. These regulations often require capital to comply, forcing smaller companies out of the sector. (investopedia, 2019) With global warming becoming a global issue, there is much more work going into persuading people to drive their cars less as petrol fuel adds to the greenhouse gasses. Not only this but electric cars are becoming more popular and these do not require fuel as they only need to be charged. “Electric vehicles are charged from the electricity supply, normally overnight. The problems of safety and security associated with storing and dispensing liquid fuels are eliminated.” (Electric, 1984) The reason this creates such a high barrier to entry is that in 10 years or probably less, there will be no petrol cars, only electric. Consequently, it wouldn’t be smart to make an initial investment on something which requires constant high operating costs when it may not even be in the near future. A smarter move would be to spend money on research and development to open a charging station where people can charge their cars whilst sat in a café or something similar.
In terms of product differentiation in the fuel market, there isn’t much as petrol is simply just petrol. However, shell developed something called turbo Fuel. Most retailers offer standard or premium fuels. Premium fuels have a higher octane value and provide more energy per litre of fuel. People with sports / performance cars tend to buy this and pay the premium for it. Turbo fuel is a special unleaded fuel designed for maximum power output and highest resistance against knocking for turbo charged engines. (curranoil, 2019) This is sold in the shell petrol stations and it gives customers a choice of fuel, so they feel like they have more of an input on what they put in their cars. Also, as I stated earlier that there’s not much differentiation, companies use price as a mean of product differentiation.
As you can see, it is mainly the petrol stations which belong to supermarkets that have the lower prices which is a way of demonstrating that as well as the fuel being cheap, their products will be too. However, a common theme throughout most of the prices is that they end in 9p. This is called psychological pricing as it draws the customer in as they see it as a deal if they aren’t paying the full tenth of a pound.
Competition in the oligopoly market can occur in a number of different ways. It all depends on what kind of goals the company has, the barriers to entry and what type of regulations the government has. As firms in the petroleum industry have relatively steady prices, they tend to concentrate on non-price competition. Non-price competition is a marketing strategy that typically includes promotional expenditures such as sales staff, sales promotions, special orders, free gifts, coupons, and advertising. (marketbusinessnews, non price competition, 2019) Places like Tesco do promotions whereby if you spend £50 in their stores, you get 5p off every litre of fuel you purchase. This promotion makes Tesco appealing to customers because people are becoming more concerned about saving money so will look for any deals they can find. This benefits Tesco as they may see an increase in customers in their store and their petrol stations. In oligopolistic non-price competition, it is common for suppliers to differentiate themselves in regard to satisfaction of the customers and the quality of the product. However, as petrol can’t really be differentiated, it’s hard to compete by saying your product is the superior one therefore this is why firms do promotions/deals etc.
In conclusion, the UK Petrol retailing market is oligopolistic because it has a few big firms which generally dominate the market. In addition, there are a number of smaller firms with lower market shares who compete amongst themselves. There is little product differentiation, which means that price differentiation is more important to the retailers due to strategic independence. However, a firm with little market share wouldn’t set their prices in line with bigger firms because they have less value and are cheaper meaning they are in different competition stages. So, the firms set their prices in line with the competition. For example, Tesco and Asda would compete on prices whereas Tesco and BP probably wouldn’t. There are two types of retailers – pure petrol retailers (e.g. BP / Shell) and supermarket retailers such as Tesco etc. Interestingly most supermarket retailers buy fuel from the petrol retailers and discount it with promotions and deals. This is a good thing because it makes the retailer more attractive to the customers which helps them gain more competitive advantage.