IS TACIT COLLUSION FUELLING HIGHER PETROL PRICES? - Herald Sun

Competition is the best way to fuel growth and end tacit collusion, Herald Sun, 5 February 2017

Do you know which day of the week is cheapest to buy groceries? Or which day of the week is cheapest to buy whitegoods, cars and home appliances? Spoiler alert: there isn’t one! So why is there a cheap day to buy petrol? If hundreds of petrol stations really are engaged in dog-eat-dog competition, why do they all raise prices on the same day of the week?

After decades of researchers trying to understand bowsernomics, a new study may have cracked the nut.  Economists David Byrne from the University of Melbourne and Nicolas de Roos from the University of Sydney analyse nearly 2 million daily petrol prices. Alarmingly, they find that petrol retailers have been engaged in ‘tacit collusion’, resulting in coordinated prices, less competition and higher margins for retailers.

To be clear, these experts are not alleging the type of collusion that involves secret meetings, fake moustaches and disposable mobile phones. Rather, it is ‘tacit’ collusion where, through a gradual and unspoken process, firms slowly converge on the same pricing strategy so as to maximise revenues.

Sifting through the data, the researchers produce the economic equivalent of an Agatha Christie novel. They find that the dominant firm, BP, performed the role of the price leader. BP’s prices acted as a focal point for the broader market to converge on. Through a long process of trial and error, by 2010 all petrol stations had adopted the same pricing strategy.

Here’s how the game ended up being played. Every Thursday prices went up by 15-20 cents per litre. Then, for the next six days, the price fell by 2 cents each day. Like clockwork, the cycle repeats itself week after week. The only change was in 2015, when all petrol stations switched from Thursday price jumps to Tuesday price jumps.

The economists show that the outcome of this tacit collusion has been higher margins and reduced competition. From 2003 to 2016, the margins they study tripled from 5 to 15 cents per litre – meaning that drivers paid an extra $7 to fill up a Toyota Camry. Similarly, the numbers of ‘price wars’ between competitors, and the duration of those price wars, have dropped dramatically. Although the researchers focus on Perth, that’s only because it was the place with the best petrol data. Indeed, there’s every reason to think that the same patterns may have been occurring across other Australian cities.

The threat of tacit collusion is a huge challenge for policymakers. Make no mistake: tacit collusion is anti-competitive. It’s bad for consumers and bad for the economy. But it is not necessarily illegal nor easily enforceable. So what can we do about it?

The first step is to identify the circumstances in which tacit collusion is likely to occur. Tacit collusion is most likely to occur in industries that tend to be more concentrated, particularly when there is one large dominant player that can act as the price leader.

This is bad news for Australia, where the largest four fuel retailers have more than 70 percent of the market (in the United States, the comparable figure is less than 20 percent). And it isn’t just a problem at the pump. According to the standard measure of market concentration, more than half of Australia’s industries are concentrated. This means we need to be much better at identifying competition problems before they cause damage.

That’s why Labor has committed to give the competition watchdog a market studies power will do just that. It will allow it to undertake in-depth analysis of particular industries to identify competition problems before they wreak havoc.  

We also need to look for ways to make Australia’s industries less concentrated, particularly by encouraging new businesses to get going. For all the chatter about start-ups and innovation, there are now 11,000 fewer businesses in the economy than in 2011.

We must also ensure that mergers and acquisitions, which have increased three-fold since the early nineties, are only being allowed to proceed if they are in the public interest and do not result in unnecessarily concentrated markets.

Finally, we have to make sure that tacit conclusion doesn’t become explicit. The criminalisation of cartels by Chris Bowen in 2010 was vital in deterring anti-competitive conduct in Australia. Labor is building on this reform through raising financial penalties for anti-competitive conduct and doubling the Australian Competition and Consumer Commission’s litigation budget to ensure it has the firepower to go after firms that flout the law.

Bringing down prices at the pump means that transport businesses can employ more workers. For households, it helps stretch their family budgets further. It’s also a progressive measure. As a share of income, the poorest fifth of Australians spend three times a much on petrol as the richest fifth. For these people, a lack of competition isn’t some abstract concept. It can mean going without so they can still afford to drive the kids to school. If you want to create jobs, help the disadvantaged and reduce inequality, boosting competition is a great way to do it.  

Andrew Leigh is the Shadow Assistant Treasurer and the Shadow Minister for Competition and Productivity. This opinion piece was first published in the Herald Sun on Monday, 6 February 2017. 


Showing 4 reactions

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  • commented 2017-03-14 21:51:48 +1100
    Would you please tell us about how this sharing session was built?This website http://www.lordofpapers.com is helping the people to create an environment where the people can improve their skills.Who will be the chief guest for the next event?
  • commented 2017-03-14 21:50:46 +1100
    Would you please tell us about how this sharing session was built?This website <a href=“”http://www.lordofpapers.com/“>http://www.lordofpapers.com/”>http://www.lordofpapers.com</a> is helping the people to create an environment where the people can improve their skills.Who will be the chief guest for the next event?
  • commented 2017-02-08 13:37:54 +1100
    Political parties collude too, often explicitly. They go on a “unity ticket”, for example on the treatment of asylum seekers. What can we do about that?
  • commented 2017-02-06 18:48:40 +1100
    Anyone with half a brain could figure it out. It’s about catching unwary motorists out with an empty fuel tank with a high fuel price combination. In WA where price changes have to be notified in advance, the average price of fuel is significantly lower than elsewhere.
    The fluctuating fuel price came about after the fuel price deregulation had been in force for a couple of years and the majors found the fuel price was gradually being forced down to uneconomic levels by independent outlets being used by the majors to increase market share. They then found a sharp price increase by one major would usually be followed by a knee jerk price increase from the other majors, then followed by the independents which was a price level short circuit, resetting the market. Occasionally, some independents didn’t comply and didn’t raise prices, obviously supported by one or more majors with the aim of selling more fuel. The independents, which are all supplied by the majors, were just a tool for the majors. It was a game of ducks and drakes played by all. The discount war would then start in earnest, with one of majors, usually Shell, forcing fuel prices way down until everybody was losing money hand over fist. When the price leader decided everyone had hurt enough, the fuel price would then go through the roof. Occasionally, one of the majors, through their tied ‘independents’, would not play the game, probably due to some personality argument between the two major’s CEOs, so the war would resume, on for young and old, so to speak. Eventually, marketplace reason would prevail and the war would end with everyone putting prices up.

    These were ‘interesting times’ in the fuel industry history. The motoring public loved these wars, of course. How low would they go, one wondered? You’d chase 0.1 cent/litre just to encourage the madness.

    Eventually, the ad-hoc system evolved into the almost regulated tacit agreement system now operating, where the fuel price goes up on a particular weekday and erodes back down over the remainder. Occasionally, the price rise day changes to catch everyone out and give the oil companies a bonus.

    I’ve been watching this process evolve since fuel price deregulation. Been quite fascinating to observe. If I remember correctly there was an actual intercompany illegal cartel price agreement happening for a while which ended in prosecution and huge fines. However, I can’t find any reference to it online. Probably too long ago to be recorded online. it was replaced by the current tacit agreement which does exactly the same thing The only way to combat it is to introduce the WA style system, of notified price increases so motorists aren’t caught out, which seems to work.

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