Friday, October 07, 2011

Petrol cartel again

Despite the number of times I and others explain it the price of petrol keeps reappearing in the Letters pages of the Shuttle. So let's try one of the argument again.

Let's assume there is little to no new market in petrol sales. Sure there are those who have just learned to drive, but they're flightly; nice to have but can't be depended on quite yet. Unlike other markets there are few stating "Well I'd buy petrol if only it were a bit cheaper" or "I was planning a long car trip, but what with the price of petrol I won't". As such the core market is relatively static.

With that in mind consider a hypothetical petrol station selling at 135.9p/litre. As we know VAT is 20% and fuel duty is 57.95p/litre the station is getting 55.3p/litre. To make life simple let's consider all of that as profit.

This station sells 2,000 litres of petrol a day and thus makes a profit of £1,106. However a competitor sets up shop and starts selling at 130.9p/litre. The next day our first station realises they're losing 250litres worth of sales per day thus 'only' making £967.75.

Simplistic competition dictates that our first station should lower their prices to match. However customers can be fickle things and in this case doing so would only lure back half the litres lost.

Selling 1750 litres at 135.9p makes a profit of £967.75.
Selling 1875 litres at 130.9p makes a profit of £958.75.

Provided there are no more losses the first station makes more money by keeping the price at the same level and not matching the competition.


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