Sound familiar? Firms in an oligopoly generally make very high profits due to a lack of genuine competitive pressure. Photo / 123RF
Sound familiar? Firms in an oligopoly generally make very high profits due to a lack of genuine competitive pressure. Photo / 123RF
COMMENT
The big news is the Commerce Commission has found that the major oil companies may have been ripping us off at the petrol pumps. They have been using loyalty schemes, occasional discounting, sundry competitions and giveaways to disguise the fact that they actually hate competing directly on price.
Thisis exactly as Economics 101 would predict. The oil companies operate in a market structure called an oligopoly. This market is characterised by a few large sellers; high barriers to entry for new firms; and a high degree of market power for the firms. Firms in an oligopoly generally make very high profits because of their control over prices due to a lack of genuine competitive pressure.
Competition between firms is meant to ensure a fair deal for consumers. Yet, crucial markets in New Zealand often lack genuine competitive pressures.
The big three oil companies in New Zealand control the supply chain infrastructure for the wholesale market for fuel in New Zealand. This makes it very expensive and logistically difficult for new firms, such as Gull, to enter the fuel market in New Zealand. In the few regions where new firms operate, they can make a significant difference to local fuel prices for consumers.
Oligopoly markets are common in New Zealand. Oil companies, banks, building suppliers, phone companies, electricity companies and supermarket chains all operate in oligopoly markets.
Firms in oligopolies hate competing directly with each other on price. In a genuine price war, the consumer gains and they all lose. This is why pricing plans for cellphone data or electricity are often a confusing maze of packages with all sorts of bundling and differing terms and conditions. This makes it impossible for consumers to directly compare value for money for different sellers for the underlying product. It is a deliberate policy to minimise direct competition on price.
New Zealand's economy has been operated on the illusion of the efficacy of market forces in recent decades. Sadly, the invisible hand of the market often resembles a gnarled, grasping claw. Competition between firms is meant to ensure a fair deal for consumers. Yet, crucial markets in New Zealand often lack genuine competitive pressures.
The role of the Commerce Commission in New Zealand is to ensure consumers are protected from predatory practices by firms. This is most likely to occur in markets such as oligopolies, where genuine competitive pressures may be absent. It is crucial that the Commerce Commission is well resourced, especially in investigative and legal representation. It must also have very sharp teeth in penalties for those firms who exploit their market power. Otherwise, we all get ripped off.
The share price of Z energy fell 3 per cent when the Commerce Commission released its draft report. Some shareholders were obviously concerned about regulatory action by Government. The likely response of the big oil companies will be to lawyer up, to employ the best legal talent in town in order to challenge the draft report and any proposed regulatory changes. They have the most to lose if any meaningful change goes ahead. The Commerce Commission faces a serious battle.
Adam Smith, the father of modern economics wrote, "people of the same trade seldom meet together either for diversion or merriment [without] the conversation turning to some conspiracy against the public, or some contrivance to raise prices".
The Commerce Commission is the main protector of Kiwi consumers against predatory practices by firms. We need to ensure it has the support and capacity to do its crucial job - otherwise we will all keep on paying the price.
• Peter Lyons teaches economics at Saint Peter's College in Epsom and has written several economics texts
