Cycles

This section analyzes how the petrol prices in NSW change with time. The graphs obtained below gives
information regarding hourly brand average prices, retail prices of each brand, station level prices, and
terminal gate price. The figure below shows data related to the average price according to the brands.

Figure 1: brand average price

The bold black line represent the terminal gate price which is the price at which the petrol sold to the
customers. Moreover, it is used as an indicator in order to compare the difference in price. TGP does not
tell the actual cost as it does not involve all of the operating cost. The average price terminal gate price
(TGP) had a slight increase till February reaching a value of 117. Till May it increased at an increasing
rate reaching a value of 140. It experienced a slight dip in June and then decreased at an increasing rate
reaching a value of about 123. From august, TGP maintained a somewhat constant value of 128 till mid-
September, afterwards having a sharp rise, reaching a value of 140. The average price decreased till
November at a decreasing rate. At the end of the year it maintained a steady value of around 132.

The average prices of every brand is likely to move in similar directions because they are related to the
international prices. However, the movement of price by one brand is not reflected by the movement of
another brand. From figure 1. It can be observed that 7 eleven experienced the most fluctuations in the
average price. Over the course of the year 7 eleven experienced around 14 trough. A sharp dip was
observed every month. In November, Caltex Woolworths experienced a sudden dip which led to a
change of around -11 %. All of the brands experienced almost the same fluctuation patterns but differed
in the amplitude and impact of the average prices. The overall prices seemed to be increasing over the
period of time at slow rate, however the amplitude is observed to be increasing at each time interval.
The length of the cycles remains somewhat same for all the brands. 7 eleven is observed to be the price
leader over the course of the year while the remaining brands are price followers.
The figure above shows station level prices of each brand. For 7 eleven, the prices in the first three
months of the year were observed to be increasing while in the remaining months it started to decrease.
This can be seen from TGP value. The prices experienced major fluctuations in February and the second
half of the year. The TGP for BP remained constant after April. TGP remained between 140 and 130 till
June. BP observed major dips in the months of May and June. All of the brands experience same
behavior TGP but varies in prices. Coles express and Caltex Woolworths experience the lowest prices in
June which results in the least value of TGP. Among all the brands, Metro Fuel most dips during the six
months with minimum price going as low as 100. There is observed to be three cycles after April which
increases the prices to 170 of Coles Express, Caltex, Caltex Woolworths, BP and 7 eleven. While the
remaining brands prices reached a value of 160. The price cycles in all of the figures can be observed by
the sharp increase in fall in the prices of all brands. From the above figures, it can be observed that there
are more price cycles after April as compared to the first three months for all the brands. The reasons in
the changes of these price fluctuations are describes in the next section.

Explanation

The Australian is less likely to be at risk for increase in petrol price now in comparison to 1970s.
According to Valadkhani (2013), the changes in oil prices are mainly due to changes in the Singaporean
petrol price, exchange rate and taxes. Moreover, the author states that prices of petrol are likely to be
more expensive during the later days of the week such as Thursday and Friday. The Australian
Competition and Consumer Commission (ACCC) also has a significant role towards the price changes.
Because the demand of each brand of petrol is price elastic, a large amount of market share is given to
the retailers through a small change in price. Price of petrol is decreased unless and until one of the
brands withdraws its support from the retailers. As a result, the remaining brands follow the same
pattern which results in a sharp increase in prices. The discount provided by the retailers cannot be
offered mostly as they tend to maximize their profits (Mitchelle, 2000).

The development of theoretical model of petrol prices has some major challenges that requires various
demand and supply factors that are significant in determining prices. This includes firm specific branding
effects, travel routines of customers, customers’ petrol management, and customers’ knowledge
regarding petrol prices. The price strategies of petrol stations depends on the wholesale cost and factors
which effect the demand. According to the Bertrand price equilibrium, each firm declares a single price
with mixed or pure strategies. Firms choose the price which are at a profit maximizing range. Some
economist believe that the oligopoly model (Maskin and Tirole, 1988) is the most appropriate to
examine the price cycles of petrol. The oligopoly model, two firm set the price that sell the same
product. In this model, the firm alternately decide the prices. All the brands use Markov strategies i.e
they use other brands prices from previous time period in order to set the current price. Moreover, this
model undersells the prices of other brands only when the price is equal to marginal cost.

According to findings of Eckert (2003), the asymmetry in the size of the organization leads to the price
equilibrium. However, there are some weakness in the model in examining the price cycles. The model
lacks traceability which does not allow many firms to set the price. It is observed that price cycle only
are found in medium sized markets. For Sydney, price is restored on Monday. The restoration of prices is
not mentioned in the oligopoly model. In opposition to the model, another model is proposed for
explaining the petrol prices. This model has n firms which has homogeneous product and marginal cost
and competes to set the prices with other firms. Varian’s model incorporates that some people have
prior knowledge while making purchases. Whereas, the remaining people make decisions without any
prior information. According to the model, price cycles is regarded as the pricing strategies with sales.
Furthermore, it also helps in explain the competition among different firms and also the demand of
consumers. Just like previous models, this model also has some limitations. This does not study
regularity in price cycles and the role of price setter which was discussed earlier.
References
Valadkhani, A. (2013). Seasonal patterns in daily prices of unleaded petrol across Australia. Energy
policy, 56, 720-731.

Mitchell, J. D., Ong, L. L., & Izan, H. Y. (2000). Idiosyncrasies in Australian petrol price behaviour:
evidence of seasonalities. Energy Policy, 28(4), 243-258.

Eckert, A. (2003). Retail price cycles and the presence of small firms. International Journal of Industrial
Organization, 21(2), 151-170.

Maskin, E., & Tirole, J. (1988). A theory of dynamic oligopoly, II: Price competition, kinked demand
curves, and Edgeworth cycles. Econometrica: Journal of the Econometric Society, 571-599.

Byrne, D. P. (2012). Petrol price cycles. Australian Economic Review, 45(4), 497-506.