Oligopolistic theory

1. Oligopolistic theory predicts collusion and price stability, but assumes that there are only a few competitors in the marketplace and that information is freely shared among these competitors. In the case of gasoline retailers in the United Kingdom, these conditions are not met.

It is true that there are a only a few oil companies (called the seven sisters by some) who control the flow of gasoline into and within the United Kingdom. The largest of these, Shell and Exxon (through its Esso subsidiary), dominate the market. When two smaller companies, British Petroleum (BP) and Mobile joined forces in 1996, it was to bolster their own competitive edge in the marketplace. Prior to the merger, these two companies did not have the financial clout to participate in price fixing.

However, price fixing in the strictest terms (as in collusion among companies) is prohibited under British law (just as it is in the United States). Typically, companies will match the prices of their competitors in order to maintain market share, particularly when the product in question is viewed strictly as a commodity where the purchase decision is based nearly exclusively on price, which is how most consumers view gasoline.

Despite the activities of the "seven sisters," there are also other participants in the retail market, including independent retailers (small business owners) and large supermarket chains who can subsidize their gasoline sales with sales of other products. The independent

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h as supermarkets) through other activities. Independent retailers who depend on gasoline sales for most of their revenues cannot decrease their prices at the same rate as the "giants" of the industry; as a result, the independents are forced from the market. The lesson of subsidization has not been lost on oil companies. Convenience stores have been added to gasoline stations in order to subsidize gasoline sales (with the result that increased revenues are coming from non-gasoline sales in many outlets) and these "one-stop" shopping experiences are designed to take some business away from supermarkets which also sell gasoline. In this way, customers may stop for only a few items at the gasoline station rather than taking on the logistics of the supermarket. However, constructing or augmenting stations with convenience stores is not an inexpensive proposition; this, in combination with the lower profit margins associated with lower prices at the gasoline pump, is likely to result in short-term financial performance which is below what companies would ideally like to see. 3. Oil companies such as Esso may well lose money, even substantial amounts of money, during the short-term. This is because the price war results in less

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