Nova workboard

a blog from young economists at Nova SBE

Fuel: make prices public or not?

In 2013 the German Competition authorities obliged oil companies and petrol station operators to report to the Market Transparency Unit any change in price of the fuel types Super E5, Super E10 and Diesel. The purpose of such as policy is to “enable consumers to gain information on current fuel prices at petrol stations”[i]. But we should ask: will the problem be solved this way? Is this the best solution?

Oil is one of the sectors for which collusion is more frequently claimed to exist. Even if, in most cases, collusion is not proved to exist, it appears to be a non-transparent sector. In this sense, it is not surprising that such a measure is found in here.

In basic economic models, we consider information is perfect. However, this assumption is far from being realistic. Searching for the most competitive prices is costly and, thus, gives room for the non-exhaustion of arbitrage opportunities.

In this sense, these costs are almost eliminated with such a measure: people just have the cost of searching on the internet (“the Market Transparency Unit for Fuels (…) receives the price data from the mineral oil companies and petrol station operators and passes these on to private consumer information service providers, which in turn inform the consumer”[ii]), that nevertheless is not null. Besides this, some associated costs (such as transport ones) are not removed. But, undoubtedly, consumers are now more capable of doing a “good” decision than before. I think this was the reason explaining this policy change, going along with the purpose of enabling “consumers to gain information on current fuel prices in Germany”[iii]. If we assume that this measure does not incentivize collusive behavior, consumers will unambiguously be better off.

However, the problem (and thus the origin of this post) lies on the fact that this last assumption does not fit reality. Indeed, price observability helps collusive behavior to be taken. The reasoning besides this is simpler than what it might seem: when prices are not observable, it becomes harder to detect deviations to a tacit agreement between firms, raising concerns of confounding deviations with shocks on demand. With observable prices, a firm deciding to deviate is detected very quickly, making punishment fast to impose. Firms have, therefore, larger incentives to continue colluding than before.

Given this concern, the effects of this policy shift may not be as bright as predicted. Although consumers are now better supplied of information concerning the fuel goods, this may not necessarily impose that they are better off, because even if choosing with a better information background than before, probably the prices amongst which they will choose are now higher. The policy can, indeed, have the opposite effect of the one it was intended to. The measure was not taken a lot of time ago, since “its normal operation [started] on 1 December 2013”[iv] (besides the fact that most information that is available is not in English, so it would be hard for me to collect it), so it is difficult to see accurately, at this point, the effects of the policy. When enough data is available, it would be worthwhile to compute a regression that would test for possible structural changes in prices with this measure, controlling for demand-side factors and international price fluctuations.

While not having a magic formula for, in a competitive framework, improving consumers’ welfare with such a scenario, I think competition authorities should think in alternative ways of improving consumers’ welfare, by imposing firms to behave competitively. A tougher control of firms’ practices and the creation of mechanisms that promote denunciations of these practices seem to be, although non-magic solutions, more suitable to this problem.

Samuel, 624

Advertisements

Author: studentnovasbe

Master student in Nova Sbe

Comments are closed.