Tag: cartels

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The CMA fuels concerns over high petrol and diesel prices

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

  1. What forms can tacit collusion take?
  2. 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?
  3. What are the main findings of the CMA’s July 2024 Interim Report
  4. What is meant by rocket and feather pricing?
  5. What recommendations does the CMA make for increasing competition in the retail road fuel market?
  6. Find out how competitive retail fuel pricing is in two other developed countries. Why are they more or less competitive than the UK?
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OPEC cartel faces lawsuit for price fixing

Cartels are formal collusive agreements between firms, typically to fix prices, restrict output or divide up markets. As in the case of monopoly, the lack of competition may harm consumers, who are likely to have to pay higher prices. This, as economic theory demonstrates, results in a reduction in overall welfare.

For this reason competition authorities throughout the world now impose substantial fines on firms found to be involved in collusive activities and participants also face the threat of substantial jail sentences.

One of the most famous cartels is the Organization of Petroleum Exporting Countries (OPEC). This is an agreement between 12 countries to limit their production of oil. The OPEC cartel has been in place for over 50 years. Arguably, the intergovernmental nature of the cartel and political ramifications of intervening have meant that OPEC has been able to operate free from prosecution for so long.

However, very interestingly Freedom Watch, a US public interest group founded by a former US Department of Justice lawyer, has this week filed a lawsuit against OPEC for violation of competition laws. Quoted in the above press release, Larry Klayman, the founder of Freedom Watch, says that:

These artificially-inflated crude oil prices fall hard on the backs of Americans, many of whom cannot afford to buy gasoline during these severely depressed economic times.

Furthermore, how some of the members use the profits gained from the cartel is also called into question. He also goes on to suggest that the lack of intervention from US government agencies may be because the leaders of both political parties:

… line their pockets from big oil interests and are just sitting back and not doing anything.

This is not the first time that Freedom Watch has served a lawsuit on OPEC. In 2008, at an OPEC meeting in Florida:

In a bold move in front of members of the news media, Freedom Watch Chairman and Chief Legal Counsel Larry Klayman literally jumped out from behind a line of TV cameras and microphones on Friday, October 24, to serve a complaint on an OPEC oil minister.

That complaint was unsuccessful.

It will be fascinating to see the outcome of this latest case and, if successful, the implications for OPEC – updates to appear on this blog in due course.

Articles

Profile: Opec, club of oil producing states BBC News (01/02/12)
OPEC accused of conspiracy against consumers WND World, Bob Unruh (09/05/12)
Freedom Watch Attorney Sues OPEC Oil Minister for Economic Terrorism Conservative Crusader, Jim Kouri (31/10/08)

Lawsuits

Lawsuit brought by Freedom Watch inc. against OPEC (7/5/12)
Lawsuit brought by Freedom Watch inc. against OPEC (9/6/08)

Questions

  1. Why are cartels so severely punished?
  2. Why might it be important to punish the individuals involved as well as fine the cartel members?
  3. Why is fixing the price of oil particularly harmful for the economy?
  4. Why do you think the OPEC cartel has survived for so long?
  5. What do you think might be the long term implications of the lawsuit for OPEC?
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Oligopolies galore

Oligopoly: it’s a complex market structure and although closer to the monopoly end of the ‘Market Structure Spectrum’, it can still be a highly competitive market. The characteristics are well-documented and key to the degree of competition within any oligopoly is the number of competitors and extent to which there are barriers to entry.

The greater the barriers and the fewer the competitors the greater the power the established firms have. This can then spell trouble for pricing and hence for consumers. The following articles are just some examples of the oligopolies that exist around the world and some of the benefits and problems that accompany them.

Articles

Oligopoly of PSU oil cos reason for high ATF prices The Indian Express, Smita Aggarwal (30/4/12)
Group energy buying hits the UK headlines Spend Matters UK/Europe(18/1/11)
German cartel office probes petrol companies on pricing Fox Business (4/4/12)
Gov’t unveils steps to lower fuel prices Yonhap News (19/4/12)
How big banks threaten our economy Wall Street Journal, Warren Stephens (29/4/12)
UK Governance: Call for Whitehall to simplify the landscape for SME suppliers to win more government contracts The Information Daily (26/4/12)

Other blogs
Pumping up the price: fuel cartels in Germany April 2012
Energy profit margins up by over 700% October 2011
Every basket helps October 2011
The art of oligopoly December 2010

Questions

  1. What are the assumptions of an oligopolistic market structure?
  2. Consider (a) the energy sector and (b) the banking sector. To what extent does each market conform with the assumptions of an oligopoly?
  3. In the ‘Spend Matters’ article, a group of people in a Lincolnshire village formed a local buying consortium to negotiate deals for heating oil. What could we refer to this as?
  4. To what extent is an oligopoly in the public interest?
  5. Explain how barriers to entry in oligopolies affect the competitiveness and efficiency of a market.
  6. Illustrate how an oligopolistic market structure can fix prices and hence exploit consumers.
  7. How have the actions of the big oil companies in both the UK and Germany been against independent retailers and the consumer interest?
  8. What action can governments take to break up oligopolies? Will it always be effective?