Pricing peculiarities of the UK petrol market
| DOI | https://doi.org/10.1108/10610429910267002 |
| Date | 01 April 1999 |
| Pages | 153-162 |
| Published date | 01 April 1999 |
| Author | Marcel Cohen |
| Subject Matter | Marketing |
Pricing peculiarities of the UK
petrol market
Marcel Cohen
Lecturer in Marketing Strategy, Management School, Imperial
College of Science, Technology and Medicine, University of London,
London, UK
Keywords Competitive strategy, Leverage, Petrol, Pricing, Pricing strategy
Abstract The UK petrol market has experienced, over the last two decades, intense price
competition and as such provides a rich source of information on some of the real-world
issues in pricing. Examines the practical mechanisms that have been used in managing
price competition and also some of the peculiarities of this market. The petrol retailing
market is found to adhere broadly to classical theory of price competition but its special
characteristics cause interesting deviations. Of particular note, a ``leverage effect''
operates whereby price changes affect margins much more than volumes, which leads to
behaviour by oil competitors which seems counter-intuitive. In addition, real-world issues
± such as the price adjustment process and the local nature of competition ± present
practical difficulties which can have a material impact on the profitability that a textbook
exposition of pricing might lead us to expect.
Introduction
Although the petrol market exhibits many of the textbook principles of price
competition, it does possess some specific characteristics and mechanisms
which cause it to behave in a distinctive manner. In this article, we expose
some of these major points of difference and consider the consequences that
arise from them.
While petrol has been the subject of a number of articles, these papers have
been preoccupied with non-price initiatives ± such as Ang and Tan (1990),
Treadgold and Lennox (1994) and Cohen (1998a). Pricing in the petrol
market has received less attention. We could only find Slade (1989, 1992),
who uses gasoline prices in the USA to uncover underlying strategies during
price wars. We differ from Slade (1989, 1992) in that while we look at the
strategies adopted by oil companies our focus is on the underlying
infrastructure and mechanisms of the market. We suggest that it is these
characteristics that are important and that cause interesting deviations from a
classical exposition of the subject.
e set the scene by considering the attitude of motorists to petrol and in
particular to the price of petrol. We then explore the distinctive features of
this market ± the price adjustment processes (both upward and downward),
the local nature of competition, and finally the presence of a leverage effect.
Motorists' attitudes to petrol and its price
It is well-known (see Popcorn, 1991) that consumers have become
increasingly sophisticated when making buying decisions and this applies
equally to the purchase of petrol. No longer can motorists be persuaded that
one brand of petrol may be better than another brand ± to them ``petrol is
petrol is petrol''. The presence of official national and international standards
that guarantee minimum quality specifications gives motorists the assurance
they need. Additionally, the behaviour of oil companies, whether through
exchange agreements ± where competitors supply each other's sites to lower
distribution costs ± or their very involvement in price competition, is a
blatant admission by them that petrol is a commodity with little or no
differentiation. This lack of differentiation is of course the main reason why
JOURNAL OF PRODUCT & BRAND MANAGEMENT, VOL. 8 NO. 2 1999, pp. 153-162, #MCB UNIVERSITY PRESS, 1061-0421 153
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