OnDemand WTP Pricing Research

Competition is the best way to fuel growth and end tacit collusion | Herald Sun

DO you know which day of the week is cheapest to buy groceries? Or which day is cheapest to buy whitegoods, cars and appliances?

Spoiler alert: there isn’t one! So why is there a cheap day to buy petrol? If hundreds of petrol stations really are engaged in dog-eat-dog competition, why do they all raise prices on the same day of the week?

After decades of researchers trying to understand “bowsernomics”, a new study may have cracked the nut. Economists David Byrne from the University of Melbourne and Nicolas de Roos from the University of Sydney analysed almost two million daily petrol prices. Alarmingly, they find that petrol retailers have been engaged in “tacit collusion”, resulting in co-ordinated prices, less competition and higher margins for retailers.

To be clear, the experts are not alleging the type of collusion that involves secret meetings and disposable mobile phones. Rather, it is “tacit” collusion where, through a gradual and unspoken process, firms slowly converge on the same pricing strategy so as to maximise revenues.

Sifting through the data, the researchers produce the economic equivalent of an Agatha Christie novel. They find that the dominant firm, BP, performed the role of the price leader. BP’s prices acted as a focal point for the broader market to converge on. Through a long process of trial and error, by 2010 all petrol stations had adopted the same pricing strategy.

Here’s how the game ended up being played. Every Thursday, prices went up by 15-20c a litre. Then, for the next six days, the price fell by 2c each day. Like clockwork, the cycle repeats itself week after week. The only change was in 2015, when all petrol stations switched from Thursday price jumps to Tuesday jumps.

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Competition is the best way to fuel growth and end tacit collusion | Herald Sun.