Sunday, March 8, 2009

Why free competition will not bring down petrol price

Petrol price is not regulated in Australia. It is assumed that as long as there is no price collaboration among retailers, then the price of petrol will regulate itself to the advantage of consumers. This is a fallacious assumption. The idea is very simple, but then life is not so simple. Even if there is no price collaboration, if every petrol station is making lots of money, no owner is going to rock the boat. Over a period of time, the profit margin is going to be cast in stone and petrol price will remain high indefinitely.

Here is how this can happen:
Once all the retailers are used to a high annual profit, they are going to sell their business at a very high price when they retire. The guy who buys over the business is going to need a very high profit margin to service the bank loan he takes. Therefore he cannot lower his price. He has to maintain a high profit margin even if global oil prices tumble drastically.

The real profiteers are the early birds who have bought the petrol stations at a low price and sell out at a very high price. Let's hope the government is wise enough to exercise price controls on all essential goods and commodities. Self regulation is no regulation, as the whole world has just learned from the banking crisis of 2008.

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