Case study 1 Oil pump price war Based on an article from The Telegraph, 10 July 2009 “Asda, the supermarket chain, sparked a potential petrol price war yesterday as it cut its fuel prices to 99.9p per litre, declaring there was “little justification” to charge more than £1 at the pumps. The reduction was made on petrol and diesel, representing an average cut of 2p and 1p respectively, at all the company’s 176 forecourts. The move was quickly followed by a pledge from Morrisons that it too would sell petrol for under £1 a litre, signalling the start of a price war. BP said it would cut prices by around 2p at many of its sites, and would continue to respond to local competition. A spokesman for the AA said: “Asda’s price drop marks the start of a new price war. Others will have no choice but to follow.” Asda’s Commercial director David Miles said: “There is no justification for any major retailer selling fuel above £1 per litre – that is why we are delighted to be able to reduce both petrol and diesel to 99.9p per litre for all our customers in line with falling costs.” The company said its average pump prices for petrol was 103.9p per litre, and for diesel 105.9p per litre The price of crude oil has been on the rise in recent months, but it is still less than half the 140 dollars a barrel level it reached at its height last year. But the sudden $10 drop in the
Case study 1
Oil pump price war
Based on an article from The Telegraph, 10 July 2009
“Asda, the supermarket chain, sparked a potential petrol price war yesterday as it cut its fuel prices to 99.9p per litre, declaring there was “little justification” to charge more than £1 at the pumps.
The reduction was made on petrol and diesel, representing an average cut of 2p and 1p respectively, at all the company’s 176 forecourts.
The move was quickly followed by a pledge from Morrisons that it too would sell petrol for under £1 a litre, signalling the start of a price war. BP said it would cut prices by around 2p at many of its sites, and would continue to respond to local competition.
A spokesman for the AA said: “Asda’s price drop marks the start of a new price war. Others will have no choice but to follow.”
Asda’s Commercial director David Miles said: “There is no justification for any major retailer selling fuel above £1 per litre – that is why we are delighted to be able to reduce both petrol and diesel to 99.9p per litre for all our customers in line with falling costs.”
The company said its average pump prices for petrol was 103.9p per litre, and for diesel 105.9p per litre
The price of crude oil has been on the rise in recent months, but it is still less than half the 140 dollars a barrel level it reached at its height last year.
But the sudden $10 drop in the price of oil in recent days could potentially produce a 5p drop in the pump price, according to experts. ”
Questions
1] How would you describe the market structure of oil pumps?
2] Briefly discus the type of demand function an oil pump station is facing?
3] What are the likely effects of a potential price war on
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