Competition Effects of Transparency of German Fuel Markets

1. INTRODUCTION

One of the most strategic economic section is the oil sector. Its development is also asubject of public interest. Not many companies have managed to initiate a long-term share infuel market, since a perpendicular and parallel assimilations are used. For instance, in Europe,global fuel dealers like ExxonMobil, Total and BP are the dynamics in this sector (Hesch,2012, p. 41).

The debate is mainly about the fuel prices and regular fluctuations, and collusion. This has seen many countries introducing ways to monitor the industry. The best example is western Austria, where prices are set every twenty-four hours. The consumers are made aware so they can adjust accordingly. Australia is known as one of the competitive fuel markets at cheaper rates. Besides that Germany has different market dynamics and it has introduced a different strategy to monitor the market. Its citizens pay more for fuel in contrast to other markets, like France (Krezner and Le More, 2012, p. 146-148).

Investigations by the Federal Cartel office have revealed the existence of dominantoligopoly on the German fuel markets. With cartels being illegal, multinational firms thatcreate the oligopoly, sometimes come together without any written agreement to control price.In most cases, they never agree but their actions dictate the prices. Australian fuel marketdiffers from German one, because in Australia the state regulates the timing of the pricing andnot price itself. This is seen in the in the 24-hour model (Bundeskartellamt, 2011, p. 12-13).

Transparency agency in Germany standardizes as well as monitors, although the agency is not mandated to determine prices. If we compare German fuel market with France we see that they have also far different oil industry structures, with Germany adopting three levels while France adopts two.

2. THEORETICAL BACKGROUND

The price of fuel stations contingents on many factors like service, brand and especially location. Therefore the number of companies in a big city is not a right pointer of the competitiveness. It is not obligatory to set the prices at locations individually. As an example, some locations have one manager who regulates prices at all fuel locations. Moreover, retail prices that are posted can be changed hastily, which makes it easy to identify defection. Therefore, the benefit from defection is not worth it. Instead, it is easier to make tacit collusion (Borenstein and Shepard, 1996, p. 430).

The fuel market involves many providers with different market power. The main issueis to forecast the equilibrium time path or trajectory of the price of oil, where a trajectory isequilibrium (Newbery, 1981, p. 619). Accordingly, the balance must be same with eachprovider’s consideration of its market power. The primary technique is to differentiate cartelsthat pretend to dominant provider, from the others who behave as a fringe provider. This issignificant and that is the ground, why it is a perfect competition and monopoly behavior, inaddition to the problems of oligopoly behavior. This idea was first defended by Pindyck as afirst estimation about the fuel market in relation to gains from OPEC Cartel (Newbery, 1981, p. 619).

The fuel industry can use Nash-Cournot equilibrium. Fuel industry is a sum ofindependent firms, which suppliers sell the oil at the same price. Each firm can think as aplayer of a Cournot non-cooperative game (Salant, 1976, p. 1079-1081). The cartel has muchmore market power compared to other firms. If we consider that the rest of oil’s stock isshared equally, a dominant firm (Salant, 1976, p. 1080). At the end, the cartel does notmanage to sell oil cheaper than other firms. The only advantage of the cartel is to own moreoil (Salant, 1976, p. 1981). In the world, there are some examples of price regulatorymechanism in the fuel market. For instance, Luxembourg government uses price-ceilingtechnique to determine the retail price.

The Game theory can clarify this model. If a given maximum price reached, it can beusual for suppliers to use this opportunity. If one player influences other players to actsimilarly, the result could be equilibrium among layers using the most expensive price(Hesch, 2012, p. 37). Another example of price regulatory is in Western Australia with ‘24 hour rule’. According the 24 hour rule, supplier should fix their price for each calendar day between 6 am to 6 am (Hesch, 2012, p. 39). To effectively manage the cartel problem Germany finds the solution of price transparency, illustrated in the following section.

The fuel markets in Germany aren`t working proficiently because of the oligopolistic character of the market. There are major players among international oil corporations and they can profit from economies of scale unlike smaller players. They also charge the independent petrol stations more since they do not have refineries on their own. The independent petrol station retailers have even lodged complaints with the Federal Cartel Office about high prices set by the big companies. This burdens them because sometimes they even pay give more than the end consumers, which stifles competition. This also drives prices up and ends up hurting consumers (Haucap and Müller, 2012, p. 4).

Fuel markets are well monitored by the administration to protect the tiny players fromlarge global oil corporations from unfair competition and caution of the consumers from anyillegal price fixing or price wars. It attracts attention of academics, and unlike Canada,Australia and the USA. Germany doesn`t have any detailed scientific search of its competitionprocess in the fuel sector yet. Where markets are closely monitored and regulated, theconsumers usually get the best prices, like in Australia where the price is set every 24 hours.For fuel markets to work properly for everyone’s benefit they can be monitored closely butthe upper hand should not change the running of the markets if no rules are being broken(Hesch, 2012, p. 39).

3. GERMAN FUEL MARKETS

Cyclical price movements of fuel are analyzed by using “Edgeworth price model“. According to this model, the Federal Cartel Office has declared that that two market leaders, Aral and Shell, open new prices usually. According to investigations of the Federal Cartel Office, in recent years’ example in Cologne the number of price increases has changed from 1235 to 18726. The Federal Cartel Office has conducted many investigations but could not find any result about the existence of collusion (Haucap, 2012, p. 3).

[...]