Artificial Intelligence (AI) is transforming the way we live and work, with many of us knowingly or unknowingly using some form of AI daily. Businesses are also adopting AI in increasingly innovative ways. One example of this is the use of pricing algorithms, which use large datasets on market conditions to set prices.
While these tools can drive innovation and efficiency, they can also raise significant competition concerns. Subsequently, competition authorities around the world are dedicating efforts to understanding how businesses are using AI and, importantly, the potential risks its use may pose to competition.
How AI pricing tools can enhance competition
The use of AI pricing tools offers some clear potential efficiencies for firms, with the potential to reduce costs that can potentially translate into lower prices for consumers.
Take, for instance, industries with highly fluctuating demand, such as airlines or hotels. Algorithms can enable businesses to monitor demand and supply in real time and respond more quickly, which could help firms to respond more effectively to changing consumer preferences. Similarly, in industries which have extensive product ranges, like supermarkets, algorithms can significantly reduce costs and save resources that are usually required to manage pricing strategies across a large range of products.
Furthermore, as pricing algorithms can monitor competitors’ prices, firms can more quickly respond to their rivals. This could promote competition by helping prices to reach the competitive level more quickly, to the benefit of consumers.
How AI pricing tools can undermine competition
However, some of the very features that make algorithms effective can also facilitate anti-competitive behaviour that can harm consumers. In economic terms, collusion occurs when firms co-ordinate their actions to reduce competition, often leading to higher prices. This can happen both explicitly or implicitly. Explicit collusion, commonly referred to as illegal cartels, involves firms agreeing to co-ordinate their prices instead of competing. On the other hand, tacit collusion occurs when firms’ pricing strategies are aligned without a formal agreement.
The ability for these algorithms to monitor competitors’ prices and react to changes quickly could work to facilitate collusion, by learning to avoid price wars to maximise long-term profits. This could result in harm to consumers through sustained higher prices.
Furthermore, there may be additional risks if competitors use the same algorithmic software to set prices. This can facilitate the sharing of confidential information (such as pricing strategies) and, as the algorithms may be able to predict the response of their competitors, can facilitate co-ordination to achieve higher prices to the detriment of consumers.
This situation may resemble what is known as a ‘hub and spoke’ cartel, in which competing firms (the ‘spokes’) use the assistance of another firm at a different level of the supply chain (e.g. a buyer or supplier that acts as a ‘hub’) to help them co-ordinate their actions. In this case, a shared artificial pricing tool can act as the ‘hub’ to enable co-ordination amongst the firms, even without any direct communication between the firms.
In 2015 the CMA investigated a cartel involving two companies, Trod Limited and GB Eye Limited, which were selling posters and frames through Amazon (see linked CMA Press release below). These firms used pricing algorithms, similar to those described above, to monitor and adjust their prices, ensuring that neither undercut the other. In this case, there was also an explicit agreement between the two firms to carry out this strategy.
What does this mean for competition policy?
Detecting collusion has always been a significant challenge for the competition authorities, especially when no formal agreement exists between firms. The adoption of algorithmic pricing adds another layer of complexity to detection of cartels and could raise questions about accountability when algorithms inadvertently facilitate collusion.
In the posters and frames case, the CMA was able to act because one of the firms involved reported the cartel itself. Authorities like the CMA depend heavily on the firms involved to ‘whistle blow’ and report cartel involvement. They incentivise firms to do this through leniency policies that can offer firms reduced penalties or even complete immunity if they provide evidence and co-operate with the investigation. For example, GB eye reported the cartel to the CMA and therefore, under the CMA’s leniency policy, was not fined.
But it’s not all doom and gloom for competition authorities. Developments in Artificial Intelligence could also open doors to improved detection tools, which may have come a long way since the discussion in a blog on this topic several years ago. Competition Authorities around the world are working diligently to expand their understanding of AI and develop effective regulations for these rapidly evolving markets.
Articles
Questions
- In what types of markets might it be more likely that artificial intelligence can facilitate collusion?
- How could AI pricing tools impact the factors that make collusion more or less sustainable in a market?
- What can competition authorities do to prevent AI-assisted collusion taking place?
The market for crude oil is usually a volatile one. Indeed, in the last few months, the market has seen prices rise and fall due to various supply and demand influences. Crude oil is coined the ‘King of Commodities’ due to the impact it has on consumers, producers and both the micro and macro economy. The price of crude oil affects everything from the cost of producing plastics, transportation, and food at the supermarket.
This makes the market for crude oil an economic powerhouse which is closely watched by businesses, traders, and governments. To gain a full understanding of the movements in this market, it is important to identify how demand and supply affect the price of crude oil.
What influences the demand and supply of crude oil?
The law of demand and supply states that if demand increases, prices will rise, and if supply increases, prices will fall. This is exactly what happens in the market for crude oil. The consumer side of the market consists of various companies and hundreds of millions of people. The producer side of the market is made up of oil-producing countries. Collectively, both consumers and producers influence the market price.
However, the demand and supply of crude oil, and therefore the price, is also affected by global economic conditions and geopolitical tensions. What happens in the world impacts the price of oil, especially since a large proportion of the world’s biggest oil producers are in politically unstable areas.
Over the past five years, global events have had a major impact on the price of oil. The economic conditions created by the impact of the COVID pandemic saw prices plummet from around $55 per barrel just before the pandemic in February 2020 to around $15 per barrel in April 2020. By mid-2021 they had recovered to around $75 per barrel. Then, in the aftermath of Russia’s invasion of Ukraine in February 2022, the price surged to reach $133 in June 2022. More recently, geopolitical tensions in the Middle East and concerns about China’s economic outlook have intensified concerns about the future direction of the market. (Click here for a PowerPoint of the chart.)
Geopolitical tensions
In the first week of October 2024, the price of crude oil rose by almost 10% to around $78 per barrel as the conflict in the Middle East intensified. It unfortunately comes at a time when many countries are starting to recover from the rise in oil prices caused by the pandemic and the war in Ukraine. Any increase in prices will affect the price that consumers pay to fill up their vehicles with fuel, just when prices of diesel and petrol had reached their lowest level for three years.
The Governor of the Bank of England, Andrew Bailey, has said that the Bank is monitoring developments in the Middle East ‘extremely closely’, as the conflict has the potential to have serious impacts in the UK. The Bank of England will therefore be watching for any movement in oil prices that could fuel inflation.
The main concerns stem from further escalation in the conflict between Israel and the Iran-backed armed group, Hezbollah, in Lebanon. If Israel decides to attack Iran’s oil sector, this is likely to cause a sharp rise in the price of oil. Iran is the world’s seventh largest oil exporter and exports over half of its production to China. If the oilfields of a medium-sized supplier, like Iran, were attacked, this could threaten general inflation in the UK, which could in turn influence any decision by the Bank of England to lower interest rates next month.
Supply deficits
This week (2nd week of October 2024) saw the price of crude oil surge above $81 per barrel to hit its highest level since August. This rise means that prices increased by 12% in a week. However, this surge in price also means that prices rose by almost 21% between the start September and the start of October alone. Yet it was only in early September when crude oil hit a year-to-date low, highlighting the volatility in the market.
As the Middle-East war enters a new and more energy-related phase, the loss of Iranian oil would leave the market in a supply deficit. The law of supply implies that such a deficit would lead to an increase in prices. This also comes at a time when the US Strategic Petroleum Reserve has also been depleted, causing further concerns about global oil supply.
However, the biggest and most significant impact would be a disruption to flows through the Strait of Hormuz. This is a relatively narrow channel at the east end of the Persian Gulf through which a huge amount of oil tanker traffic passes – about a third of total seaborne-traded oil. It is therefore known as the world’s most important oil transit chokepoint. The risk that escalation could block the Strait of Hormuz could technically see a halt in about a fifth of the world’s oil supply. This would include exports from big Gulf producers, including Saudi Arabia, UAE, Kuwait and Iraq. In a worst-case scenario of a full closure of the Strait, a barrel of oil could very quickly rise to well above $100.
Disruption to shipments would also lead to higher gas prices and therefore lead to a rise in household gas and electricity bills. As with oil, gas prices filter down supply chains, affecting the cost of virtually all goods, resulting in a further rise in the cost of living. With energy bills in the UK having already risen by 10% for this winter, an escalation to the conflict could see prices rise further still.
China’s economic outlook
Despite the concern for the future supply of oil, there is also a need to consider how the demand for oil could impact price changes in the market. The price of oil declined on 14 October 2024 in light of concerns over China’s struggling economy. As China is the world’s largest importer of crude oil, there are emerging fears about the potential limits on fuel demand. This fall in price reversed increases made the previous week as investors become concerned about worsening deflationary pressures in China.
Any reduced demand from China could indicate an oversupply of crude oil and therefore potential price declines. Official data from China reveal a sharp year-on-year drop in the producer price index of 2.8% – the fastest decline in six months. These disappointing results have stirred uncertainty about the Chinese government’s economic stimulus plans. Prices could fall further if there are continuing doubts about the government’s ability to implement effective fiscal measures to promote consumer spending and, in turn, economic growth.
As a result of the 2% price fall in oil prices on 14 October, OPEC (the Organization of the Petroleum Exporting Countries) has lowered its 2024 and 2025 global oil demand growth. This negative news outweighed market concerns over the possibility that an Israeli response to Iran’s missile attack could disrupt oil production.
What is the future for oil prices?
It is expected that the market for oil will remain a volatile one. Indeed, the current uncertainties around the globe only highlight this. It is never a simple task to predict what will happen in a market that is influenced by so many global factors, and the current global landscape only adds to the complexity.
There’s a wide spectrum of predictions about what could come next in the market for crude oil. Given the changes in the first two weeks of October alone, supply and demand factors from separate parts of the globe have made the future of oil prices particularly uncertain. Callum Macpherson, head of commodities at Investec, stated in early October that ‘there is really no way of telling where we will be this time next week’ (see the first BBC News article linked below).
Despite the predominately negative outlook, this is all based on potential scenarios. Caroline Bain, chief commodities economist at Capital Economics suggests that if the ‘worst-case scenario’ of further escalation in the Middle East conflict does not materialise, oil prices are likely to ‘ease back quite quickly’. Even if Iran’s supplies were disrupted, China could turn to Russia for its oil. Bain says that there is ‘more than enough capacity’ globally to cover the gap if Iranian production is lost. However, this does then raise the question of where the loyalty of Saudi Arabia, the world’s second largest oil producer, lies and whether it will increase or restrict further production.
What is certain is that the market for crude oil will continue to be a market that is closely observed. It doesn’t take much change in global activity for prices to move. Therefore, in the current political and macroeconomic environment, the coming weeks and months will be critical in determining oil prices and, in turn, their economic effects.
Articles
- How worried should I be about rising oil prices?
BBC News, Michael Race (4/10/24)
- Interest rates could fall more quickly, hints Bank
BBC News, Dearbail Jordan (3/10/24)
- Oil Prices Eye $100 A Barrel As War Risk Premium Returns
FX Empire, Phil Carr (8/10/24)
- Crude oil futures reverse previous gains following disappointing economic data from China
London Loves Business, Hamza Zraimek (14/10/24)
- Oil falls 2% as OPEC cuts oil demand growth view, China concerns
Reuters, Arathy Somasekhar (14/10/24)
- Could war in the Gulf push oil to $100 a barrel?
The Economist (7/10/24)
- The Commodities Feed: Oil remains volatile
ING Think, Ewa Manthey and Warren Patterson (8/10/24)
- Who and what is driving oil price volatility
FT Alphaville, George Steer (9/10/24)
- Brent crude surges above $80 as conflict and storm spark supply fears
Financial Times, Rafe Uddin and Jamie Smyth (7/10/24)
Questions
- Use a demand and supply diagram to illustrate what has happened to oil prices in the main two scenarios:
(a) Conflict in the Middle East;
(b) Concerns about China’s economic performance.
- How are the price elasticities of demand and supply relevant to the size of any oil price change?
- What policy options do the governments have to deal with the potential of increasing energy prices?
- What are oil futures? What determines oil future prices?
- How does speculation affect oil prices?
On Saturday 31 August, tickets for the much-heralded Oasis reunion tour went on sale through the official retailer, Ticketmaster. When the company sells tickets, the acts or their promoters can choose whether to use a static pricing system, where each type of ticket is sold at a set price until they have all been sold. Or they can use a dynamic pricing system (‘in-demand’ or ‘platinum’ tickets, as Ticketmaster calls them), where there is a starting price quoted, but where prices then rise according to demand. The higher the demand, the more the price is driven up. Acts or their promoters have the option of choosing an upper limit to the price.
Dynamic pricing
The Oasis tickets were sold under the dynamic pricing system, a system previously used for Harry Styles, Bruce Springsteen, Coldplay and Blackpink concerts, but one rejected by Taylor Swift for her recent Eras tour. Standing tickets for the Oasis concert with a face value of around £135 were quickly being sold for over £350. There were long online queues, with the prices rising as people slowly moved up the queue. When they reached the front, they had to decide quickly whether to pay the much higher price. Some people later suffered from buyer’s remorse, when they realised that in the pressure of the moment, they had paid more than they could afford.
Dynamic pricing is when prices change with market conditions: rising at times when demand exceeds supply and falling when supply exceeds demand. It is sometimes referred to as ‘surge pricing’ to reflect situations when price surges in times of excess demand.
Dynamic pricing is a form of price discrimination. It is an imperfect form of first-degree price discrimination, which is defined as people being charged the maximum price they are willing to pay for a product. Pricing in an eBay auction comes close to first-degree price discrimination. With dynamic pricing in the ticket market, some people may indeed pay the maximum, but others earlier in the queue will be lucky and pay less than their maximum.
Ticketmaster justifies the system of dynamic pricing, saying that it gives ‘fans fair and safe access to the tickets, while enabling artists and other people involved in staging live events to price tickets closer to their true market value’. The company argues that if the price is below the market value, a secondary market will then drive ticket prices up. Ticket touts will purchase large amounts of tickets, often using bots to access the official site and then resell them at highly inflated prices on sites such as Viagogo and Stubhub, where ticket prices for popular acts can sell for well over £1000. The day after Oasis tickets went on sale, Viagogo had seats priced at up to £26 000 each!
Oasis and Ticketmaster have tried to stamp out the unofficial secondary market by stating that only tickets bought through the official retailers (Ticketmaster, Gigsandtours and SeeTickets) will be valid. If fans want to resell a ticket – perhaps because they find they can no longer go – they can resell them on the official secondary market though Ticketmaster’s Fan-to-Fan site or Twickets. These official secondary sites allow holders of unwanted tickets to sell them for anything up to the original face value, but no more. Buyers pay a 12% handling fee. It remains to be seen whether this can be enforced with genuine tickets resold on the secondary market.
Examples of dynamic pricing
Dynamic pricing is not a new pricing strategy. It has been used for many years in the transport, e-commerce and hospitality sectors. Airlines, for example, have a pricing model whereby as a flight fills up, so the prices of the seats rise. If you book a seat on a budget airline a long time in advance, you may be able to get it at a very low price. If, on the other hand, you want a seat at the last minute, you may well have to pay a very high price. The price reflects the strength of demand and its price elasticity. The business traveller who needs to travel the next day for a meeting will have a very low price sensitivity and may well be prepared to pay a very high price indeed. Airlines also learn from past behaviour and so some popular routes will start at a higher price. A similar system of dynamic pricing is used with advance train tickets, with the price rising as trains get booked up.
The dynamic pricing system used by airlines and train companies is similar, but not identical, to first-degree price discrimination. The figure below illustrates first-degree price discrimination by showing a company setting the price for a particular product.
Assume initially that it sets a single profit-maximising price. This would be a price of P1, at an output of Q1, where marginal revenue (MR) equals marginal cost (MC). (We assume for simplicity that average and marginal costs are constant.) Total profit will be area 1: i.e. the blue area ((P1 – AC) × Q1). Area 2 represents consumer surplus, with all those consumers who would have been prepared to pay a price above P1, only having to pay P1.
Now assume that the firm uses first-degree price discrimination, selling each unit of the product at the maximum price each consumer is willing to pay. Starting with the consumer only willing to pay a price of P2, the price will go on rising up along the demand with each additional consumer being charged a higher price up to the price where the demand curve meets the vertical axis. In such a case, the firm’s profit would be not just the blue area, but also the green areas 2 and 3. Note that there is no consumer surplus as area 2 is now part of the additional profit to the firm.
Although dynamic pricing by airlines is similar to this model of first-degree price discrimination, in practice some people will be paying less than they would be willing to pay and the price goes up in stages, not continuously with each new sale of a ticket. Thus, compared with a fixed price per seat, the additional profit will be less than areas 2 + 3, but total profit will still be considerably greater than area 1 alone. Note also that there is a maximum quantity of seats (Qmax), represented by a full flight. The airline would hope that demand and its pricing model are such that Qmax is less than Q2.
Dynamic pricing also applies in the hospitality sector, as hotels raise the prices for rooms according to demand, with prices at peak times often being considerably higher than off-season prices. Rather then pre-setting prices for particular seasons, dates or weekends/weekdays, many hotels, especially chains and booking agents, adjust prices dynamically as demand changes. Airbnb offers property owners what it calls ‘Smart Pricing’, where nightly prices change automatically with demand.
Another example is Uber, which uses dynamic pricing to balance demand and supply location by location. In times of peak demand on any route, the company’s algorithm will raise the price. This will encourage people to delay travelling if they can or use alternative means of transport. It will also encourage more Uber drivers to come to that area. In times of low demand, the price will fall. This will encourage more people to use the service (rather than regular taxis or buses) and discourage drivers from working in that area.
Where dynamic pricing varies with the time or date when the purchase is made, it is sometimes referred to as inter-temporal pricing. It is a form of second-degree price discrimination, which is where a firm offers consumers a range of different pricing options for the same or similar products.
Another example of dynamic pricing, which is closer to first-degree price discrimination is the use of sophisticated algorithms and AI by Amazon, allowing it to update the prices of millions of products many times a day according to market conditions. Another is eBay auctions, where the price rises as the end date is reached, according to the willingness to pay of the bidders.
Attitudes to dynamic pricing
Consumers have grown accustomed to dynamic pricing in many industries. People generally accept the pricing model of budget airlines, for example. What makes it acceptable is that most people feel that they can take advantage of early low-priced seats and can compare the current prices on different flights and airlines when making their travel plans. Pricing is transparent. With the Oasis concert, however, there wasn’t the same degree of price transparency. Many people were surprised and dismayed to find that when they got to the front of the online queue, the price had risen dramatically.
People are familiar of dynamic pricing in the context of price cuts to shift unsold stock. Supermarkets putting stickers on products saying ‘reduced for quick sale’ is an example. Another is seasonal sales. What is less acceptable to many consumers is firms putting up prices when demand is high. They see it a profiteering. Many supermarkets are introducing electronic shelf labels (ESLs), where prices can be changed remotely as demand changes. Consumers may react badly to this if they see the prices going up. The supermarket, however, may find it a very convenient way of reducing prices to shift stock – something consumers are hardly likely to complain about.
Returning to the Oasis tour, the UK government responded to the outrage of fans as ticket prices soared. Culture Secretary, Lisa Nandy, announced that the government will investigate how surge pricing for concert tickets is used by official retailers, such as Ticketmaster. This will be part of a planned review of ticket sales that seeks to establish a fairer and more transparent system of pricing.
The problem is that, with some fans being prepared to pay very high prices indeed to see particular acts and with demand considerably exceeding supply at prices that fans would consider reasonable, some way needs to be found of rationing demand. If it is not price, then it will inevitably involve some form of queuing or rationing system, with the danger that this encourages touts and vastly inflated prices on the secondary market.
Perhaps a lesson can be drawn from the Glastonbury Festival, where prices are fixed, people queue online and where security systems are in place to prevent secondary sales by ticket touts. The 2024 price was set at £355 + a £5 booking fee and purchasers were required to register with personal details and a photo, which was checked on admission.
Update
On 5 September, the CMA announced that it was launching an investigation into Ticketmaster over the Oasis concert sales. Its concerns centred on ‘whether buyers were given clear and timely information, and whether consumer protection law was breached’. This followed complaints by fans that (i) they were not given clear and timely information beforehand that the tickets involved dynamic pricing and warned about the possible prices they might have to pay and (ii) on reaching the front of the queue they were put under pressure to buy tickets within a short period of time.
Meanwhile, band member stated that they were unaware that dynamic pricing would be used and that the decision to use the system was made by their management.
Videos
Articles
- Oasis ticket sales – everything you need to know about reunion
BBC News (27/8/24)
- Ticketmaster demand-based pricing system criticised
BBC News, Annabel Rackham (10/10/22)
- I loved Oasis – until I saw Ticketmaster’s dynamic pricing
Metro, Issy Packer (2/9/24)
- A supersonic swindle: my £1,423 Oasis Ticketmaster hell
The Guardian, Josh Halliday (1/9/24)
- Bands urged to oppose dynamic pricing of concert tickets after Oasis ‘fiasco’
The Guardian, Josh Halliday and Rob Davies (1/9/24)
- Oasis tickets: what is dynamic pricing and why is it used for live music?
The Guardian, Rob Davies (1/9/24)
- Viagogo defends reselling Oasis tickets for thousands of pounds as ‘legal’
City A.M. (31/8/24)
- Oasis fans face ‘eye-watering’ resale ticket prices
i News, Adam Sherwin (30/8/240
- Would you really pay €500 for an Oasis ticket?
RTE Brainstorm, Emma Howard (3/9/24)
- When ‘dynamic pricing’ works – and when it doesn’t
Investors’ Chronicle, Hermione Taylor (11/12/23)
- The pros, cons and misconceptions of dynamic pricing for retailers
Computer Weekly, Glynn Davis (20/6/24)
- Dynamic Pricing (Taylor’s Version)
Linkedin, Economic Insight (10/7/23)
- Dynamic pricing: successful companies that use this pricing strategy
PriceTweakers, Simon Gomez (25/5/24)
- Five lessons for businesses investigating dynamic pricing
FT Strategies
- Inflated Oasis ticket prices ‘depressing’ – government promises review of dynamic pricing
Sky News (2/9/24)
- Lisa Nandy hits out at ‘incredibly depressing’ Oasis ticket sale and orders probe into surge pricing
Independent, Archie Mitchell (2/9/24)
- Oasis ticket row: How Ticketmaster’s owner has grip on UK live music scene
BBC News, Chi Chi Izundu and James Stewart (4/9/24)
- CMA launches investigation into Ticketmaster over Oasis concert sales
CMA Press Release (5/9/24)
- Revealed: the touts offering Oasis tickets for thousands on resale sites
The Guardian, Rob Davies, Hannah Al-Othman and Tiago Rogero (7/9/24)
Questions
- What is the difference between dynamic pricing and surge pricing?
- What is buyer’s remorse? How could dynamic pricing be used while minimising the likelihood of buyer’s remorse?
- Distinguish between first-degree, second-degree and third-degree price discrimination. Do the various forms of dynamic pricing correspond to one or more of these three types?
- Distinguish between consumer and producer surplus. How may dynamic pricing lead to a reduction in consumer surplus and an increase in producer surplus?
- Should Ticketmaster sell tickets on the same basis as tickets for the Glastonbury Festival?
- Is Oasis a monopoly? What are the ticket pricing implications?
- Are there any industries where firms would not benefit from dynamic pricing? Explain.
- What are the arguments for and against allowing tickets to be sold on the secondary market for whatever price they will fetch?
- How powerful is Ticketmaster in the primary and secondary ticket markets?
The UK Competition and Markets Authority (CMA) has been investigating road fuel pricing in the UK. In July 2022, it launched a study into the development of the road-fuel market over recent years. The final report of this study was published in July 2023 and covered the refining, wholesale and retail elements of the market.
In the retail part of the market, the CMA noted some potential causes for concern: retailer fuel margins had increased; there were geographical variations in pricing; filling stations with fewer competitors tended to charge higher prices; retail prices tended to rise rapidly when oil prices increased but fell slowly when oil prices fell (known as ‘rocket and feather’ pricing patterns); motorway service stations charged considerably higher prices than supermarkets or other filling stations.
In response to these findings, the CMA has been publishing an interim report every four months. These reports give average pump prices and margins. They also give relative average pump prices between different types of retailer, and between each of the supermarkets.
The latest interim report was published on 26 July 2024. It reiterated the finding of the 2023 report that the fuel market has become less competitive since 2019. What is more, it continues to be so. In particular, the range of retail prices and the level of retail margins remain high compared to historic levels. The interim report estimates that ‘the increase in retailers’ fuel margins compared to 2019 resulted in increased fuel costs for drivers in 2023 of over £1.6bn’.
Price leadership
Road fuel retailing is an oligopoly, with the major companies being the big supermarkets, the retail arms of oil companies (such as Shell, BP, Esso and Texaco, operating their own filling stations) and a few large specialist companies, such as the Motor Fuel Group (MFG), the EG Group and Rontec, whose filling stations sell one or other of the main brands. But although it is an oligopoly producing a homogeneous product, it is not a cartel (unlike OPEC). Nevertheless, there has been a high degree of tacit collusion in the market with price competition limited to certain rules of behaviour in particular locations. A familiar one is setting prices ending in .9 of a penny (e.g. 142.9p), with the acceptance by competitors that Applegreen will set it ending at .8 of a penny and Asda at .7 of a penny.
One of the main forms of tacit collusion in areas where there are several filling stations is that of price leadership. Asda, and in some areas Morrisons, have been price leaders, setting the lowest price for that area, with other filling stations setting the price at or slightly above that level (e.g. 0.2p, 1.2p or 2.2p higher). Indeed, other major retailers, such as Tesco, Sainsbury’s, Esso and Shell took a relatively passive approach to pricing, unwilling to undercut Asda and accept lower profit margins.
Things changed after 2019. Asda chose to increase its profit margins. In 2022 it did this by reducing prices more slowly than would previously have been the case as wholesale prices fell. In other words, it used price feathering. Other big retailers might have been expected to use the opportunity to undercut Asda. Instead, they decided to increase their own margins by following a similar pricing path. The result was a 6 pence per litre increase in the average supermarket fuel margin from 2019 to 2022.
More recently, Asda has increased its margins more than other major retailers, making it no longer the price leader. The effect has been to put less pressure on other retailers to trim their now higher profit margins.
Remedies
The 2023 CMA report made two specific recommendations to deal with this rise in profit margins.
The first was that the CMA should be given a statutory monitoring function over the fuel market to ‘hold the industry to account’. In May this year, legislation was passed to this effect. This requires the CMA to monitor the industry and report anti-competitive practice to the government.
The second was to introduce a new statutory ‘open data real-time fuel finder scheme’. This would give motorists access to live, station-by-station fuel prices.
Several major retailers already contribute to a voluntary price data sharing scheme. However, this covers only around 40% of UK forecourts. According to the CMA, it ‘falls well short of the comprehensive, real-time, station-by station data needed to empower motorists and drive competition’. The CMA has thus called on the new Labour government to introduce legislation to make its recommended system compulsory. This, it is hoped, would make the retail fuel market much more competitive by improving consumer information about prices at alternative filling stations in their area.
Articles
CMA reports
Questions
- What forms can tacit collusion take?
- Why are fuel prices at motorway service stations so much higher than in towns? What is the relevance of the price elasticity of demand to the answer?
- What are the main findings of the CMA’s July 2024 Interim Report
- What is meant by rocket and feather pricing?
- What recommendations does the CMA make for increasing competition in the retail road fuel market?
- Find out how competitive retail fuel pricing is in two other developed countries. Why are they more or less competitive than the UK?
The Competition and Markets Authority (CMA) is proposing to launch a formal Market Investigation into anti-competitive practices in the UK’s £2bn veterinary industry (for pets rather than farm animals or horses). This follows a preliminary investigation which received 56 000 responses from pet owners and vet professionals. These responses reported huge rises in bills for treatment and medicines and corresponding rises in the cost of pet insurance.
At the same time there has been a large increase in concentration in the industry. In 2013, independent vet practices accounted for 89% of the market; today, they account for only around 40%. Over the past 10 years, some 1500 of the UK’s 5000 vet practices had been acquired by six of the largest corporate groups. In many parts of the country, competition is weak; in others, it is non-existent, with just one of these large companies having a monopoly of veterinary services.
This market power has given rise to a number of issues. The CMA identifies the following:
- Of those practices checked, over 80% had no pricing information online, even for the most basic services. This makes is hard for pet owners to make decisions on treatment.
- Pet owners potentially overpay for medicines, many of which can be bought online or over the counter in pharmacies at much lower prices, with the pet owners merely needing to know the correct dosage. When medicines require a prescription, often it is not made clear to the owners that they can take a prescription elsewhere, and owners end up paying high prices to buy medicines directly from the vet practice.
- Even when there are several vet practices in a local area, they are often owned by the same company and hence there is no price competition. The corporate group often retains the original independent name when it acquires the practice and thus is is not clear to pet owners that ownership has changed. They may think there is local competition when there is not.
Often the corporate group provides the out-of-hours service, which tends to charge very high prices for emergency services. If there is initially an independent out-of-hours service provider, it may be driven out of business by the corporate owner of day-time services only referring pet owners to its own out-of-hours service.- The corporate owners may similarly provide other services, such as specialist referral centres, diagnostic labs, animal hospitals and crematoria. By referring pets only to those services owned by itself, this crowds out independents and provides a barrier to the entry of new independents into these parts of the industry.
- Large corporate groups have the incentive to act in ways which may further reduce competition and choice and drive up their profits. They may, for example, invest in advanced equipment, allowing them to provide more sophisticated but high-cost treatment. Simpler, lower-cost treatments may not be offered to pet owners.
- The higher prices in the industry have led to large rises in the cost of pet insurance. These higher insurance costs are made worse by vets steering owners with pet insurance to choosing more expensive treatments for their pets than those without insurance. The Association of British Insurers notes that there has been a large rise in claims attributable to an increasing provision of higher-cost treatments.
- The industry suffers from acute staff shortages, which cuts down on the availability of services and allows practices to push up prices.
- Regulation by the Royal College of Veterinary Surgeons (RCVS) is weak in the area of competition and pricing.
The CMA’s formal investigation will examine the structure of the veterinary industry and the behaviour of the firms in the industry. As the CMA states:
In a well-functioning market, we would expect a range of suppliers to be able to inform consumers of their services and, in turn, consumers would act on the information they receive.
Market failures in the veterinary industry
The CMA’s concerns suggest that the market is not sufficiently competitive, with vet companies holding significant market power. This leads to higher prices for a range of vet services. However, the CMA’s analysis suggests that market failures in the industry extend beyond the simple question of market power and lack of competition.
A crucial market failure is asymmetry of information. The veterinary companies have much better information than pet owners. This is a classic principal–agent problem. The agent, in this case the vet (or vet company), has much better information than the principal, in this case the pet owner. This information can be used to the interests of the vet company, with pet owners being persuaded to purchase more extensive and expensive treatments than they might otherwise choose if they were better informed.
The principal–agent problem also arises in the context of the dependant nature of pets. They are the ones receiving the treatment and, in this context, are the principals. Their owners are the ones acquiring the treatment for them and hence are the pets’ agents. The question is whether the owners will always do the best thing for their pets. This raises philosophical questions of animal rights and whether owners should be required to protect the interests of their pets.
Another information issue is the short-term perspective of many pet owners. They may purchase a young and healthy pet and assume that it will remain so. However, as the pet gets older, it is likely to face increasing health issues, with correspondingly increasing vet bills. But many owners do not consider such future bills when they purchase the pet. They suffer from what behavioural economists call ‘irrational exuberance’. Such exuberance may also occur when the owner of a sick pet is offered expensive treatment. They may over-optimistically assume that the treatment will be totally successful and that their pet will not need further treatment.
Vets cite another information asymmetry. This concerns the costs they face in providing treatment. Many owners are unaware of these costs – costs that include rent, business rates, heating and lighting, staff costs, equipment costs, consumables (such as syringes, dressings, surgical gowns, antiseptic and gloves), VAT, and so on. Many of these costs have risen substantially in recent months and are reflected in the prices pet owners are charged. With people experiencing free health care for themselves from the NHS (or other national provider), this may make them feel that the price of pet health care is excessive.
Then there is the issue of inequality. Pets provide great benefits to many owners and contribute to owners’ well-being. If people on low incomes cannot afford high vet bills, they may either have to forgo having a pet, with the benefits it brings, or incur high vet bills that they ill afford or simply go without treatment for their pets.
Finally, there are the external costs that arise when people abandon their pets with various health conditions. This has been a growing problem, with many people buying pets during lockdown when they worked from home, only to abandon them later when they have had to go back to the office or other workplace. The costs of treating or putting down such pets are born by charities or local authorities.
The CMA is consulting on its proposal to begin a formal Market Investigation. This closes on 11 April. If, in the light of its consultation, the Market Investigation goes ahead, the CMA will later report on its findings and may require the veterinary industry to adopt various measures. These could require vet groups to provide better information to owners, including what lower-cost treatments are available. But given the oligopolistic nature of the industry, it is unlikely to lead to significant reductions in vets bills.
Articles
- UK competition watchdog plans probe into veterinary market
Financial Times, Suzi Ring and Oliver Ralph (12/3/24)
Vet prices: Investigation over concerns pet owners are being overchargedSky News (12/3/24)
- UK watchdog plans formal investigation into vet pricing
The Guardian, Kalyeena Makortoff (12/3/24)
- ‘Eye-watering’ vet bills at chain-owned surgeries prompt UK watchdog review
The Guardian, Kalyeena Makortoff (7/9/23)
- Warning pet owners could be overpaying for medicine
BBC News, Lora Jones & Jim Connolly (12/3/24)
- I own a vet practice, owners complain about the spiralling costs of treatments, but I only make 5 -10% profit – here’s our expenditure breakdown
Mail Online, Alanah Khosla (14/3/24)
- Vets bills around the world: As big-name veterinary practices come under pressure for charging pet owners ‘eyewatering’ care costs, how do fees in Britain compare to other countries?
Mail Online, Rory Tingle, Dan Grennan and Katherine Lawton (13/3/24)
CMA documents
Questions
- How would you establish whether there is an abuse of market power in the veterinary industry?
- Explain what is meant by the principal–agent problem. Give some other examples both in economic and non-economic relationships.
- What market advantages do large vet companies have over independent vet practices?
- How might pet insurance lead to (a) adverse selection; (b) moral hazard? Explain. How might (i) insurance companies and (ii) vets help to tackle adverse selection and moral hazard?
- Find out what powers the CMA has to enforce its rulings.
- Search for vet prices and compare the prices charged by at least three vet practices. How would you account for the differences or similarities in prices?