Petrol wars: siphoning off Paul to pay Peter

In fact, drive across town on any day of the week and you will find some large discrepancies in unleaded petrol prices even in service stations operated by the same major retailer.

Some may think that since the lower North Shore is perceived to be an “affluent” area in Sydney that motorists there would be paying more for petrol than the perceived “lower socio economic” areas of western Sydney. Well, let’s bust the first myth relating to petrol pricing.

Close observations reveal that price discrepancies reflect the level or “intensity” of competition in the local area rather than any perceptions of an area’s “affluence.”

In reality, the price charged for unleaded by the Coles, Woolworths and the oil companies will reflect, as closely as possible, the intensity of local competition offered by independent petrol retailers in that local area.

The more intense the competition offered by the independents, the lower the price of unleaded at a Coles, Woolworths and the oil company service station nearby.

Conversely, in the absence of strong, price competitive independents, the price of unleaded will be higher at a Coles, Woolworths and the oil company retail site in that particular local area.

So while some with vested interests continue to make value judgements about an area’s perceived “affluence,” consumers are being charged different prices for the same unleaded petrol depending on whether or not there is an aggressive independent retailer in the local area.

There goes another myth about Coles, Woolworths and the oil companies offering lower prices because they may perceive the local area to be “less affluent.”

Even if we could objectively define “affluence” without making value judgements or offending residents who are proud of where they live, corporate entities like Coles, Woolworths and the oil companies are not charities.

Corporate entities are there to maximise profits and if they can keep raising prices and reap even greater profits because of an absence of a strong independent competitor in a particular local area, then they will do so for the simple reason that they can get away with it.

In the absence of independent competition, this urge to continually push up prices to secure even greater profits turns into profiteering to the detriment of consumers.

So do Coles, Woolworths and the oil companies compete aggressively with another on price? Time to bust another myth.

Coles, Woolworths and the oil companies will only compete aggressively with another on price where they have to.

When do they have to? When there is a strong independent petrol retailer in a local market.

Why? Because that independent petrol retailer will always try to aggressively challenge Coles, Woolworths and the oil companies on price.

For the independent retailer the price of petrol at their outlet is critical to getting motorists through the door. As independents typically can’t cross subsidise “discounts” from other businesses like the big boys can, independents need to be as transparent as possible on price.

For the motorist the presence of a strong independent means lower prices from Coles, Woolworths and the oil companies as the corporate giants need to go head to head with the independent on price.

So what happens where there isn’t a strong independent in the local market? Well, Coles, Woolworths and the oil companies will merely shadow one another on price for the simple reason that if they are the only ones in the local market any aggressive price discounting by them just cuts their profit margins without necessarily delivering any new, long-lasting customers.

In practice, in a local market with only Coles, Woolworths and the oil companies any so-called “discounts” offered by any one of them is quickly matched by the others.

Over time, of course, “discounts” get build into the price of the petrol, groceries or other products tied to the “discount,” with motorists paying for the so-called “discounts” one way or another. No such thing as a free lunch!

And remember that acting as a cosy club has its advantages. The “club members” can give the semblance of “price competition” by providing token “discounts” all while prices keep getting pushed up by the club members where they don’t face strong independent competition from non-club members.

Quite simply, the pricing behaviour of Coles, Woolworths and the oil companies will reflect and respond to the pricing behaviour of the strongest independent in the local market.

That’s why motorists get lower prices where there is a strong independent in the local market. And that’s why prices are higher where there isn’t a strong independent in the local market.

This practice of charging different prices for the same product where you can get away with it is called geographic price discrimination. Through geographic price discrimination motorists are being ripped off by location and that’s why we need effective laws that prevent that geographic rip off.