Price Leadership in the Gasoline Market

Geoff Riley has a post with videos analyzing the UK market for gasoline as reflecting price leadership. See the original for several related video clips.

Tutor2u for Economics
Unit 3 Micro: Price Leadership in the Gas Oligopoly

Saturday, October 19, 2013 by Geoff Riley

The market for retail gas supplies is mired in controversy and threats of direct government intervention to freeze prices should a new Labour government be elected in 2015. This week we have seen a classic example of the type of price leadership we expect to see in an oligopoly.

Hot on the heels of a steep rise in prices from SSE a few days earlier (SSE announced an 8.2% increase in domestic bills from 15 November) British Gas has announced that their own energy prices will jump by an average of 9.2% from November 2013. The average annual dual-fuel bill with British Gas will increase by Β£107 to Β£1,297.

Centrica argued that the climbing price is mainly due to higher costs for wholesale energy and delivering gas and electricity to homes, and the impact of the Coalition government’s “social and (green) environmental programmes” which are paid for through customers’ bills.

But now that two of the leading six suppliers have taken the decision to lift energy bills for household, commercial and industrial users, it can only be a matter of time before EDF, E.ON, npower and Scottish Power follow suit – this is a process known as price leadership and will be well understood by students of the oligopoly market structure.

One of the consequences of the frequent gas and electricity price hikes has been a substantial fiscal dividend for the UK treasury as this news article in the Telegraph makes clear.

Cadillac in China

Here’s an article from Automotive News on the expansion of luxury car brands into the growing Chinese markets. With China now the world’s largest car market and with a luxury market already rivaling those of the west, car makers are scrambling to appeal to Chinese consumers and gain market share in this increasingly competitive market. [Yes, because everyone is there now and the easy pickings have been had … margins aren’t what they used to be, and we’re starting to see winners and losers. Before we only saw winners and bigger winners…]

GM is counting on the success of Cadillac in the Chinese market to keep the brand afloat, but recently the luxury brand’s penetration has fallen behind not caught up with German luxury cars like Audi, Mercedes, and BMW. Many attribute this recent decrease in the chinese market to a design which does not appeal to the preferences of Chinese Customers. While Cadillac’s bold and futuristic look, with sharp curves and angles, has appealed to many American customers, the confucian foundation of Chinese culture, and a preference for ‘Zhongyong’ leads consumers there to see the car as too “bold and harsh.”

With success in China paramount to Cadillac’s survival, GM is now altering the design of the cars to cater to Chinese preferences, adopting a less acute, more contemporary look. How might this affect Cadillac? Will the increased costs caused by producing different products for American and Chinese markets cover the benefits of increased market shares in China? Think back to Minimum Efficiency of Scale. If Chinese consumers have different preferences for luxury cars than Western consumers, how might the car companies react? Would they attempt to separate operations or find a middle ground between preferences which allows them to enjoy the production efficiencies of producing a product at large quantity to serve both markets?

Markets where (traditional) IO offers few lessions

This term we’ve focused on traditional goods markets, though you may have not noticed that. Here’s a good post on why some services look quite different. For me there’s an additional positive feature: it’s done with multiple references to the market(s) for passenger cars (and for haircuts, cf. our in-class discussion of a local cartel). See Healthcare and Cars on the Synthenomics blog.
Now when might this issue carry over to markets for goods? In the next couple weeks we’ll see multiple examples where focusing primarily on price and quantity fails to explain market behavior.
PS please note the modest changes in the syllabus for next week, including a reference to the proper chapter in the Martin text.