Petrol prices

Every so often a letter pops up in the Shuttle about the apparent agreement in petrol prices in this area between the major retailers, often with veiled or not so veiled allegations of price-fixing. Well I'm not saying there isn't, but with the penalties attached to such I'd be looking for a different reason.

In Vale Road, Stouport we had what might be considered a perfect market example. Two major petrol stations literally next door to each other and another just around the corner. By the standard creed of market-forces this area should have enjoyed the cheapest petrol in the area - we didn't.

The first point so many seem not to understand is that the object of the exercise in retail is to sell your product for maximum gain. So if I make a twopenny profit on a certain goods the only way I'll reduce the price by a penny is if it will gain me more than double my current sales. So how does this relate to the petrol stations in Vale Road?

Well due to their proximity should one station lower their prices it becomes negligible to use it over the others, the only reason not to is if they sold an inferior product or couldn't cope with demand. So logically each should be cutting their prices to bring in customers; so why didn't that happen? Well as soon as one station cut their price the others did the same; again this should have driven down the price. Yet remember the initial maxim about maximum gain - dropping the price will bring you a surge of new customers, but only before the others retaliate with the same price-drop then you're back to the same situation and making less money. So each station would drop their price only if one of the others did.

So shouldn't this mean prices won't rise either? Not quite as the same principle applies. If for some reason a station has to increase its prices the logical step would be for the other stations to remain the same and benefit from the increased sales. Except that would mean the 'offending' station would quickly have to drop its price back to where it was as its sales dwindled. So the price should remain static yet it doesn't and again that's because of the "maximum gain" mantra. Once one station puts up its prices the others realise they can do the same and make more money. With no difference between the three the balance is maintained at an increased profit.

So prices should increase and we pay much more than anywhere else. Except these three stations aren't isolated. If the prices increase too much it becomes worthwhile to seek out another station outside of the normal 'comfort zone' of the purchaser. So the goal becomes to sell petrol for the most they can at a price that doesn't drive their customers to seek it elsewhere.

So all these stations deem themselves able to sell at 117.9p despite Merry Hill charging 112.9p because they think that Merry Hill is outside that 'zone'.

Note that none of this requires any contact between the stations other than checking each others publicly displayed prices.