Petrol companies have the market structure of an oligopoly. An oligopoly is a market structure where there are a few dominant firms whose behavior is interdependent. There are a few dominant firms relative to market size, and they each command a large proportion of the market share, thus having strong monopoly power. Examples of petrol companies include Shell, Caltex and Exxon Mobil. Their demand curve is downward sloping, meaning that they are price setters.
Petrol is a homogeneous product, hence the oligopoly is known to be pure or perfect. Theoretically only one firm can prevail, but since the firm’s demand is not perfectly elastic, the firm has price control over its pricing policy. There is a great fear of rivals’ reactions to each respective firm’s pricing strategies due to petrol being undifferentiated.
There are also huge barriers to entry in an oligopoly. These barriers can be both natural and artificial. The few dominant firms in the oligopoly enjoy substantial internal economies of scale as they are operating on a larger scale, allowing the cost of the firm to fall continuously over a very large output. An example is in power and utilities. They have a large minimum efficient scale relative to market demand. Hence, it is difficult for a new entrant to produce at such a low unit cost, as its scale of operations would be much less than the existing dominant large firms, thus unable to compete effectively with the incumbents. This natural barrier thus discourages potential new firms from entering. In addition, the incumbent can deliberately reduce the price of its products to ward off potential entrants.
The dominant firms can gain control of the market through product differentiation, which seeks to convince or persuade customers that there are no close substitutes for the firm’s products. This is so that the demand becomes price inelastic, and to also induce customer loyalty. Some strategies include intensive advertising campaigns, such as...
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