Vertical integration by Gas Oil Companies
1. Oil companies do not allow dealers (franchisees) to buy gas from distributors. Dealers must buy gas from the central oil company. Dealers often complain that this is unfair. The practice has been the subject of antitrust lawsuits. Oil company executives argue that this policy is important because it limits free-riding on the part of the distributors. Explain the executives' arguments in more detail.
The Oil Company executives argue that allowing dealers to buy gas from distributors would be likely to cause supply disruptions and higher retail prices. According to them the existing contract system permits oil companies to correctly project how much gas they will need at any given terminal on any given date, and is a guarantee for dealers that they will have enough gas each day to supply their customers. If the contract system is abolished, it is likely that on any given day, the lowest priced terminals would run out of gas first, with many dealers disappointed when supplies are not adequate to meet their needs. According to them, if dealers buy from distributors at a lower price at the wholesale level, the profits will entirely accrue to the dealers and there is no assurance that any of these benefits would be passed on to consumers. The profits from open supply legislation are likely to be enjoyed only by those dealers who periodically are able to find and buy their supplies at a lower price from he distributors. Another reason given is, allowing dealers to buy from distributors will do nothing to increase the supply of gasoline, it would only create market uncertainty.
The amount of gasoline sold to the distributors probably will remain more or less the same, so when gasoline is sold to every possible station there would be a lot of uncertainty for the oil company and for the dealer as to they will get enough supply. 2. Suppose the courts ruled that the oil companies must allow the dealers to buy gas from distributors. What effects do you think such
The Oil Company executives argue that allowing dealers to buy gas from distributors would be likely to cause supply disruptions and higher retail prices. According to them the existing contract system permits oil companies to correctly project how much gas they will need at any given terminal on any given date, and is a guarantee for dealers that they will have enough gas each day to supply their customers. If the contract system is abolished, it is likely that on any given day, the lowest priced terminals would run out of gas first, with many dealers disappointed when supplies are not adequate to meet their needs. According to them, if dealers buy from distributors at a lower price at the wholesale level, the profits will entirely accrue to the dealers and there is no assurance that any of these benefits would be passed on to consumers. The profits from open supply legislation are likely to be enjoyed only by those dealers who periodically are able to find and buy their supplies at a lower price from he distributors. Another reason given is, allowing dealers to buy from distributors will do nothing to increase the supply of gasoline, it would only create market uncertainty.
The amount of gasoline sold to the distributors probably will remain more or less the same, so when gasoline is sold to every possible station there would be a lot of uncertainty for the oil company and for the dealer as to they will get enough supply. 2. Suppose the courts ruled that the oil companies must allow the dealers to buy gas from distributors. What effects do you think such