Question
Assessment task 2 – Responses to articles - Article 3
“New research shows how petrol retailers pushed prices up in Perth” By David Byrne from The Conversation 13th February 2017 is available at:
1. According to the article big petrol retailers “are using price setting and collusion” to inflate the price of the petrol in Perth. Explain what this means in terms of market conduct and discuss at least two other types of unfair attempts to exert market power.
2. Referring to the article explain how a cartel operates; then, illustrate and carefully analyse what are the effects of this type of behaviour on total welfare using the simple demand and supply diagram below.
3. Petrol supply is considered an example of oligopoly. Carefully explain in your own words the characteristics of this type of market structure.
Answer
1. Predominantly, price setting implies the process by which firms influence the price of goods and services whereas collusion implies the coming together of firms through anti-competitive means in the conduct of business. Usually, collusion takes place among competing firms in the same industry. Typically for most economies price setting and collusion are illegal market conduct which are regulated through competition and anti-trust laws. Primarily, price setting and collusive conduct are meant to encourage market inefficiency and exploit consumer welfare. Besides from price setting, there are other anti-competitive behaviour in the market such as price leadership whereby firms adopt the prices set by a leading firm. Usually, price leadership might happen even without any agreement among the participating firms. This price leadership can lead to higher consumer prices thus exercising power over the market. In addition, restrictive advertisement is another collusive conduct whereby firms agree on the content of information to be supplied to consumers thus having a market advantage over consumer welfare.
2. Predominantly, cartel behaviour goes against the interest of the consumers thus the need for government regulation. According to the Article, there has been price leadership exhibited by the conduct of BP petrol retailer whose price triggered the prices of other petrol retailers. Cartel behaviour is exhibited by the high petrol prices and the high profit margins for retailers as compared to previous years. Price setting is evidenced by the constant Thursday prices between petrol retailers in Australia according to the leading retailer BP prices (Bryne 2017).Usually, cartels raise the price for goods and services so as to maximise the profits of the collusive firms as illustrated by increased price illustrated by the blue mark above P* and reduced output illustrated by the blue line touching the Q* on the quantity line. Not only does the cartel raise of prices are higher but also there is restricted production of goods thus limiting the consumer choice and welfare. The fact that the supply and prices of goods and services is not dictated by factors of demand and supply but the cartel provides an unfair advantage to consumers as compared to collusive firms.
3.Notably, oligopoly refers to a market structure with few firms which dominate the industry or market structure in which they operate in. Firms operating in the oligopoly markets are called oligopolies. Also, oligopolies, are mutually dependent on each other. In essence this means that the decisions of one firm are influenced by the decision in another firm. In addition, there are high entry barriers into the market structure which might exist naturally or deliberately exploited (Economics Online 2018). Through this barriers, a few firms are able to dominate the market despite the existence of other smaller firms in the industry. Also, other firms might find it difficult to enter the market due to the substantial existence of entry barriers. Under oligopoly, the firms produce identical or products which are differentiated.
