Petrol Pricing Project

Retail fuel prices and, in particular, their fluctuations in accordance with a weekly cycle are, and have been for many years, a source of substantial consumer concern and hence the subject of significant and sustained attention by politicians, policymakers and the Australian Competition and Consumer Commission (ACCC).

Much of the focus of attention has been on the supply side of petrol markets. Measures have been taken to address structural issues (including concentration and barriers to entry at the refining level) and conduct issues (including coordinated effects in the context of acquisition proposals, information sharing amongst retailers and supermarket alliances / shopper docket schemes at the retailing level).

This project takes as its starting point that, in addition to supply side dynamics, it is important to consider the role of consumers in activating competition and, in particular, mechanisms for providing consumers with sufficient information to play that role effectively.

As recognised in the Australian Competition Policy Review draft report, advances in information technology, in particular the rise of the internet and "Big Data", are changing the information landscape of markets. Consumers increasingly exploit the web to reduce their search costs and compare rival offerings, which promotes competition among sellers. Firms are managing larger databases and using data analytics to monitor their costs and rivals' prices.

These developments raise the question: how should consumer protection and competition laws and related policy instruments evolve in the face of these rapid, technologically-driven changes in the way markets operate? This project seeks to inform this question in the context of Australian retail petrol markets, an industry that is of significant public interest and controversy not just in Australia, but worldwide.

Specifically, the project studies price transparency policies and mechanisms that leverage the web to aggregate price data to inform consumers about station-level petrol pricing day-to-day. Consistently with the Governing Marketsresearch theme of the Melbourne School of Government, the aim of the project is to shed new light on the impact such instruments have on interactions between consumers and firms in markets, and how they can help regulators like the ACCC to promote retail competition and improve welfare.

To achieve its aim the Project draws on data relating to the Fuelwatch scheme in Western Australia - a government-operated online scheme that provides petrol consumers with 24h notice of station-level petrol prices in that state. The researchers analyse the data to address two questions: do consumers use Fuelwatch to find price deals and how does retailer pricing behaviour respond to Fuelwatch-induced changes in demand behaviour.

To date the research has produced a rich data set, empirical analysis of which has yielded significant insights into the effects of enhanced demand-side transparency on competition in retail petrol price markets. The results of the project are in the process of publication in a series of journal articles. For instance, in one paper entitled "Consumer Search in Retail Gasoline Markets'' (forthcoming at the Journal of Industrial Economics), Dr. Byrne together Dr. Nicolas de Roos at the University of Sydney show households indeed exploit Fuelwatch to find deals on petrol prices exactly as consumer search theory would predict. In a related working paper, "The Internet, Search and Asymmetric Pricing: A Natural Experiment in Retail Gasoline," Dr Byrne and Dr de Roos show the search-cost reducing effects of Fuelwatch led to changes in retail price dynamics that were consistent with more competitive petrol pricing in Western Australia. Importantly, these research findings have been communicated to the Competition Policy Review (chaired by Prof. Ian Harper) in a joint submission by Prof. Beaton-Wells, Dr. Byrne and Dr. de Roos. The submission can be read here.

To obtain copies of these publications or find out more about the project generally, please contact David Byrne. To read Caron and David's contribution on the topic of petrol prices to The Conversation, click here.