Name:NgWeiKai

Class:15S7H
Tutor:MissJennyWang
AnEconomicAnalysisoftheRetailPetrolMarketinSingapore

RetailPetrolreferstotherefinedpetroleumthatissoldatregularpetrolstationsto
powervehicles.ThispaperseekstoanalysethemarketforretailpetrolinSingapore,in
termsofstructure,performanceandconduct.

1.1Structure

TheretailpetrolmarketinSingaporecanfirstandforemost,becharacterisedasan
oligopolydominatedby4industryplayers,namelySPC,Shell,ExxonMobilandCaltech(Fig1).
Eachofthe4companiesaccountsforasubstantialproportionoftheoutputoftheindustry.
Therearenosalesfiguresthatareavailabletothepublic,butdatasubmitteddirectlytothe
MinistryofTradeandIndustry(MTI)bythe4petroleumcompaniessuggestthateachfirm
doesholdsignificantmarketsharebasedontheirsalesfigures.

Fig1.PetroleumCompaniesinSingapore

Aproxyforthesalesfigureswouldbethenumberofstationsthateachcompanyowns
inSingapore.Table1showsthateachofthe4holdsasizeablenumberofpumpstationsall
acrosstheisland,suggestingthateachholdssubstantialmarketshare.
Company
Shell
ExxonMobil
Caltex
SPC
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NumberofStations
56
56
25
40
1

Inaddition,themarketconcentrationratiofortheretailpetrolmarketishighasthe
industryhasaHerfindhalHirshmanIndex1(HHI)indexvalueof3,104in2015.Thissuggests
that the market for retail petrol is Highly concentrated and is thus an oligopoly. Other
indicators,suchasthe3firmconcentrationratiocanalsobeused,thoughtheHHIisused
hereinsteadasthemarketshares(bypercentage)ofeachfirmarenotaccessible.

Furthermore,therearelargebarrierstoentrythatdeternewfirmsfromenteringthe
industry. The cost of land in Singapore is expensive and increases the cost of setting up a
petroleum station in Singapore. As such, smaller firms may not have substantial financial
powertoestablishpetrolstationsinSingapore,deterringtheentryofnewfirms.

Limited plots of land are released by the government annually for petroleum
companies to build petrol stations. While acquisition of these plots of land are conducted
fairlyviabidding,theirlimitedquantitiesmaydeternewfirmsfromachievingtheMinimum
EfficientScale(MES),sinceresearchbytheCCSsuggeststhatMESforeachfirmintheretail
petroleumindustryisapproximately30stations.Hence,theindustrymaybegearedtowards
anoligopolisticmarketstructureasonlyafewfirmsareabletoexpandsufficientlytotapon
internaleconomiesofscale(EOS).

In addition, the brand name of a firm matters in the petroleum industry. The 4
companiesinSingaporearemostlymultinationalcompanieswithanestablishedreputation
intermsofqualityandsafetyetc.Assuch,itwillbedifficultforanewfirmtoenterthemarket
andgainthetrustofconsumersasitsproductsandservicesarelikelytobeenseenasbeing
inferiortothoseofferedbytheexistingfirms.

The vertical integration of petroleum companies in Singapore may also create

additionalbarrierstoentryasitpromotesefficiencyandkeepspriceslow.Thisdisadvantages
smallerfirmswhoareunabletobenefitfromverticalintegration.Forexample,theMarginal
Costofeachadditionalunitofpetroleumislikelytobelowasthe4firmshaverefineriesat
JurongIslandinSingaporeandarethusabletoreducetransportationcostsfortheirpetrol.

TheHerfindhalHirshmanIndex(HHI)isameasureofmarketconcentration,employedtheUSDepartmentof
Justice.Itisobtainedbysummingthemarketshareofeachfirmandsumminguptheresultingnumbers.AHHI
of0willindicateperfectcompetitionwhileaHHIof10000(1oo^2)isindicativeofasinglefirmmonopoly.
Conventionally,amarketwithHHIofover1800isseenasbeinghighlyconcentrated.
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Smallerfirms,ontheotherhand,mayhavetopurchaserefinedpetroleumathighercostfrom
otherfirms,drivingupcostsandmakingitlesscompetitive.

In terms ofproduct differentiation, thereseems to belittle choice in terms of the

productsthatareavailable.The4existingfirmsonlysell4gradesofpetrol,namelyOctane
98,95,92andDiesel.Whileeachofthe4firmsmayhavedifferentnamingconventionsfor
thepetrol(E.g.EssonamesOctane98asEssoMobilSynergy8000),theproductssoldare
mostlyhomogeneous.Therearesomewhoarguethatthequalityofpetrolsoldbythevarious
firmsvaries,asthepetrolisclassifiedaccordinggradesandthereisroomfordiscrepanciesin
qualitywithinthespecificgrade.Inaddition,theperceiveddifferencesinqualitymaymerely
beduetoaplaceboeffect,whereconsumersperceivepetrolfromspecificfirmstobecleaner,
or more efficient etc. Overall, the differences in quality of petrol is likely to be negligible.
Hence,consumersareonlyabletochoosetheirsupplieraswellasthegradeofpetrolthey
wishtopurchase,buthavelittlechoicebeyondthat.Thatbeingsaid,duetothehomogeneous
nature of products, consumers can switch easily between consumers so a high degree of
competitionisstillpresent.

*Personally, I feel the sale of various grades of petrol is a form of third degree price
discrimination,asitallowsforconsumerstorevealtheirdifferentpriceelasticityofdemand.
Thisallowsthefirmtomaximiseitsprofitfrombothconsumerswhoarewillingtopaymore
(viathebettergradepetrol)andthosewillingtopayless(viatheinferiorgradepetrol).Thisis
moreprofitablethanonlyofferingonlyoneproduct.Inthiscase,offeringvariousgradesof
petrol also improves equity as it makes petrol available to a larger consumer base, since
consumerscanselecttheirpreferredgradebasedontheirpurchasingpower.Somearguethat
this is not a form of price discrimination as the input price of different grades of refined
petroleumvaries.Whilethisistrue,itisunlikelythepricedifferentialsbetweenthedifferent
gradesofpetrolisentirelyduetodifferencesininputprices.Wewillonlybeabletocometoa
justifiedconclusionwhenwehaveaccesstotheinputpricesofrefinedpetroleum.

Conduct

Recent research undertaken by the Competition Commission of Singapore (CCS), a

statutory board to promote and sustain a competitive business environment in Singapore
showedthatthereislittleevidencetosuggestcollusionamongstthe4petroleumcompanies
locally.Hence,itseemsnoncollusivemodelswillbemoresuitabletomodeltheconductof
thesefirms.

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Thekinkeddemandcurvetheoryseemstobeabletomodelthebehaviourofthe4
firmsintheSingaporeretailpetrolindustry.Inthecompetitiveoligopoly,rivalfirmswillmatch
anypricedecreasesinitiatedbyonefirm,butwillnotmatchanypriceincrease.Thistheory
helps to explain the price stickiness in the retail petrol industry, where there are hardly
instancesofunilateralpricechangesbyasinglefirm,unlessinresponsetoasignificantchange
inmarketconditions,suchasafallinthepriceofcrudeoil.Thispricestickinesshastobe
viewed in the context of petroleum. Given the high frequency and sometimes huge
magnitudeoffluctuationsinthepriceofcrudeoil,itisthisonlynaturallythenthepriceof
petroleumchangesinamatterofdaysorhours,insteadofremainingconstantforweeksor
evenmonths.Evenso,thechangesinthepriceofcrudeoilisstilloftenlowerthanthechanges
inthepricesofitsinput,asfirmschoosetoabsorbthehighercostandleavetheexisting
priceoutputcombinationunchanged(Figure3)

Figure3.PriceofCrudeOilinSingapore

Thatbeingsaid,whenthereisahugeriseincosts,priceandoutputwillchange.For
example, when the government increased its petroleum tax by 22 cents in 2015, all 4
petroleum companies increased their prices by up to 25 cents, taking into account other
factorssuchasthepriceofinputs,wages.

There are also instances of price competition between firms, though this form of
competitionisnotpreferredasitdrivesdownthepricesofpetrolandthustheprofitmargins
ofthepetroleumcompanies.Forexample,whenCaltexintroducedtheOctane98petrolin
2009,itsolditbelowtheprevailingmarketratesoastocapturemarketshare.However,the
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effectivenessofsuchamoveislimitedasotherfirmsquicklymatchedthepricedecreasein
hours. Shell even went a step further and reduced the price of its RON95 fuel. This was
followedbyfurtherpricedecreasesbytheotherfirms,leadingtoaloselosesituation.Price
competitionbetweenfirmsisrareinSingaporeasdisplaypricesareoftencomparable.Firms
willoftentrytocompetebyloweringtheireffectiveprices,byofferingspecialdiscountstoits
membersetc.

Atthesametime,firmsalsoengageinnonpricecompetitiontoincreasetheirmarket
share.All4firmshaveloyaltypointsprogramscanentitlesmemberstospecialpromotionsor
offers once they have attained a certain level of points. For example, Esso has the Smiles
Pointsprogramwherememberscanexchangetheirpointsfordiscountvouchersoruseful
merchandise. This reduces the magnitude of the firms Cross Elasticity of Demand, as its
productsbecomelesssubstitutablewiththatofotherfirms.Thisisbecauseadriverwhohas
accumulatedasubstantialamountofpointsfromEssowillnothavetheincentivetoturnto
otherrivalfirms.Inaddition,petroleumcompaniesmayalsoofferadditionalservices,suchas
freewindowcleaningservice,toattractmorecustomers.This,however,isnotimplemented
effectivelyacrosstheboardandlargelydependsonthelevelofmotivationofworkers.

Therearesomewhoarguethatthe4firmsinSingaporemaybecolludingimplicitlyvia
thepriceleadershiptheory.Thisisbecausethepricesfromall4firmsareeasilyobtainable
(shownonlargesignsoutsidestations).Hence,therecouldbeanunwrittenagreementthat
all firms will follow the pricing policy of a recognised leader, which could either be the
dominant firm or is adept at reading price conditions. However, I would personally argue
against this as the pricing strategies of all 4 firms are not homogeneous. Referring to the
examplewhereall4firmsincreasedpricesafterataxhikein2015,Caltexactuallychoseto
cutitspricesbyafewcentsaftertheConsumerAssociationofSingapore(CASE)accusedthe
firms of unethical profiteering. On the other hand, Esso and the other companies did not
changetheirprices.Thelackofauniformpricingstrategysuggeststhatthepriceleadership
theorymaynotbeasrelevantintheretailpetrolmarket,andthatcollusionisnotpresent.

Performance

ThefirmsinSingaporesretailmarketarelikelytohaveproductiveefficiencyfromthe
firmsperspectiveduetointensecompetitionfromrivals.Thusthereisaneedtoimproveon
efficiencyandkeepcostslow(I.e.produceonapointontheLRAC),soanoligopolyisunlikely
to suffer from Xinefficiencylikeamonopoly does.This is evident as the firms have taken
measuressuchasverticalintegrationtokeepcostslow.

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Fromthesocietysperspectivehowever,productiveefficiencyisnotachievedasthe
firmsdonotproduceatthelowestpointoftheLRACcurve.Thisisbecausemostofthefirms,
withtheexceptionofCaltex,havemorethantheestimatedMESof30stations.

However,allocativeefficiencyisnotachievedinanoligopolyasP>MC.Thissuggests
thatifanadditionalunitofgoodisproducedbytheoligopolist,themarginalbenefit(price)
willexceedthatofmarginalcost.Hencethereisunderproduction,associetywillbebetteroff
iftheadditionalunitofpetroleumwereproduced.

Intermsofprofits,databyMTIrevealedthatthepretaxprofitsofall4firmsranged
between010percent.Thepresenceofsupernormalprofitsischaracteristicofanoligopoly
butthelowmagnitudeofprofitssuggeststhatthefirmshavenotbeenabletofullyexploit
theirmonopolypowertogeneratemorerevenue.Hence,theindustryseemstobesufficiently
competitive.

References:
https://www.ccs.gov.sg/~/media/custom/ccs/files/media%20and%20publications/publicati
ons/market%20studies/inquiry%20into%20retail%20petrol%20market%20in%20singapore%
20may%2023.ashx
http://ohmyecons.blogspot.sg/2007/09/marketstructuremcoligopolysection3.html
http://www.esso.com.sg/ourstations
http://www.straitstimes.com/singapore/transport/justifypumppriceincreasessayscase
topetrolcompanieshere
https://www.mti.gov.sg/MTIInsights/Documents/app.mti.gov.sg/data/article/24863/doc/ES
S1Q2011__FA.pdf
https://www.ccs.gov.sg/aboutccs/whatwedo
http://www.channelnewsasia.com/news/business/singapore/noevidenceof
collusion/2539278.html
http://www.investopedia.com/terms/h/hhi.asp
http://www.myoilandgas.net/2009/03/petrolpricewarheatsupinsingapore.html
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