Market Structure of Petrol Companies - 952 Words

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†¦show more content†¦Due to the high barriers to entry, an oligopolistic firm is able to retain its supernormal profits in the long run. In an oligopoly, there is imperfect knowledge. Sellers and buyers have incomplete information regarding production methods and prices. As in the case of a monopoly, the imperfect knowledge serves as a barrier to entry of potential new firms and may at the same time; increase the price-setting ability of the oligopolistic firms. Due to the small number of competitors in the market, every action taken by any petrol company will affect all the other firms in the market significantly. Rivals’ actions cannot be ignored, as they are likely to result in adverse effects. Thus, there is a large degree of mutual interdependence. Each firm will have to assess or predict rivals’ actions to its pricing strategies. If a petrol company decides to raise its price above equilibrium price, it assesses that rivals are unlikely to follow. As a result, the quantity demanded for its petrol will fall by more than proportionate. Hence, above the equilibrium price, the demand is price elastic. On the other hand, if they were to reduce its price below equilibrium price, it predicts that rivals will match its price reduction, and quantity demanded for its petrol rises by only less than proportionate. With the price-inelastic demand, the total revenue for the firm will again fall. Hence, demand curve below the equilibrium priceShow MoreRelatedThe Indian Lubricant Market: Survival of the Slickest1452 Words   |  6 PagesLubricant Market: Survival of the Slickest Introduction The Indian automotive lubricant market is the sixth largest market in the world with revenues of approximately $1.30 billion in 2002. It is also one of the fastest growing retail markets in India. Until 1993, it was a highly regulated market with a clear dominance of the public sector. 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