Stations are Coordinating Petrol Prices

NHH researchers Øystein Foros (t.h) and Frode Steen believe that petrol stations in Norway are coordinating petrol prices, something that costs customers money. By publishing recommended retail prices on their web pages the players in the market can adjust their prices to one another. Today the market follows a cycle with the highest price occurring on Monday and the cheapest petrol on Sunday. Now, Foros and Steen stress that the companies must be forbidden from publishing recommended retail prices on the internet.

01.04.2008 - Text & photo: Per Bjarte Ulvedal Nes

Foros and Steen know good price patterns of petrol in Norway. With data stretching back to 2003, they have investigated the strategy of petrol chains.

It is on the basis of nearly 30,000 price observations that Foros and Steen claim that the stations are coordinating prices. They think that the authorities must now prevent the oil companies from publishing recommended retail prices on their web pages.

Many explanations

"It is not a problem that the companies steer the price of their own stations, what is special is that the different petrol companies are following the same patterns," says Professor Frode Steen.

The NHH researchers gave the petrol stations the benefit of the doubt, and explored other possible reasons that all the companies follow the same patterns. Demand cannot explain the pattern.

"We know little about petrol demand, but we think it is strange that they are following such a weekly cycle. Hence we think this is not an explanation of the price pattern. In addition, we are seeing that the pattern ended abruptly for the whole country during Easter 2004. Before Easter the price was highest on Thursday, afterward the highest price was on Monday. Since then the Monday pattern has continued now for four years. Therefore, it was the demand during that week which steered the price pattern, making it strange that this demand should suddenly end after Easter 2004," says Steen.

Expenses cannot explain the pattern

The price patterns could also be a result of petrol station expenses. Petrol retail price in the European market, also called the Rotterdam Price, constitutes a large portion of the station's expenses. If the retail price of petrol follows the same weekly patterns, it could explain the price trend since it would affect all companies alike.

"The Rotterdam Price variation during a week is negligible, it is less than one øre," says Steen. The Rotterdam Price plus appreciation and taxes amounts to 89 percent of the expenses for petrol stations. The remaining kroner will cover expenses like wages to staff and rent of the station. One cannot easily think that this actually follows a weekly pattern.

The fact that prices are following patterns with sudden jumps and smooth declines is not unfamiliar, it is called Edgeworth-competition," explains Steen. The theory states that the competition presses the prices down until they reach a level where it is irrational to cut them further.

"We have looked at examinations of petrol prices from the USA and Canada. The price patterns there are not nearly as regular as we see in the Norwegian market. It is normal that local competition pushes the price down until it hits a low enough point where one player realizes the price is too low for him to earn money. Then he raises the price and the others typically follow after," says Steen and points out that in the Norwegian market the price has a significantly large, regular jump up each seventh day, Monday afternoon.

Coordinating is profitable

"The conclusion is that neither explanation - costs or local competition alone - can explain the pattern. What we see in Norway is different from what we see in other countries. The companies have a common understanding to do this. They are using recommended retail prices as a tool, as a reference point so that they can zero out the competition. They make sure to end the competition on Monday - and their tool is the recommended retail price. The petrol stations in which we have data regarding this issue, we observe nothing which deviates from this system.

The customers are not benefiting from this situation. The price coordination automatically means higher prices, or else it would not be worth the company's use of resources.

"We found that the margins for the petrol stations became 14-23 percent higher after Easter 2004," says Steen. Furthermore, this has clearly been positive for the petrol stations, but at the cost of the customers.

It is evidently expensive for the customers that the companies can coordinate their prices so well. The best way to hinder coordination, is increase competition, believe the researchers. They assert that it must become more difficult for the companies to send significant price signals.

"We think that it will become much more difficult to coordinate the prices, if the petrol companies cannot announce recommended retail prices on their home web pages. We do not see any reason why these companies should be allowed to publish this price" says Steen to Paraplyen.

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Read the research paper of Steen and Foros
Translated by Jessica Hartenberger