Petrol Price Cycles

I never owned a car as a student. If I had to go somewhere, I walked or took public transport. I paid little attention to petrol prices because they did not affect my weekly budget. However, if you talk to someone who owns a car or drives to work, you will likely find they pay attention to prices at the pump.They may tell you which are the cheap petrol stations in their market, what the cheap day of the week for buying petrol is, or express concern that petrol prices rise around weekends and holidays.Consumers’ interest in petrol prices is likely driven by three facts: (1) petrol prices are displayed on large signs, making them highly visible; (2) in the short-run, consumers are unable to substitute from petrol to other fuels or modes of transportation when petrol prices rise; and (3) consumers spend a large share of their income on petrol. In 2009, the average Australian spent $51.02 per week on petrol, or 4.1% of their total weekly expenditures (ACCC 2011). Moreover, petrol is a relatively homogeneous good, which leaves consumers questioning why its price varies so much over time and across stations. Given the impact petrol costs have on consumers’ budgets, the Australian Competition and Consumer Commission (ACCC) monitors competition in Australian petrol markets. In fact, the ACCC has an entire branch solely dedicated to petrol markets! A striking finding the ACCC has documented for at least the past five years is that petrol price cycles exist in Australian cities. Figure 1, taken from an ACCC (2010) monitoring report, illustrates petrol price cycles for Adelaide, Brisbane, Melbourne, Perth, and Sydney. In these cities, the average daily petrol price drastically increases once a week (“price restorations”), followed by a sequence of daily price decreases (the “undercutting phase”), until the next price restoration occurs.1 To the extent that drivers purchase petrol from different stations at different parts of the cycle, petrol price cycles may explain why consumers form opinions about cheaper stations, cheap days for buying petrol, and petrol price hikes around weekends and holidays. This article provides an overview of the burgeoning academic literature on petrol price dynamics and cycles. I first discuss the empirical literature on price cycles in petrol markets. In light of the empirics, I then present theories of competition and consumer demand in petrol markets that help us understand the many facets of petrol price cycles. Developing such an understanding is important for antitrust policy. Policymakers require benchmark economic models that predict how prices should behave if stations set prices competitively, given market and supply conditions. With such a model in hand, authorities can effectively monitor the conduct of petrol stations, identify collusive behaviour, and design policies that help to ensure consumers pay fair prices. It is my hope that this article sheds light on the economics behind petrol price cycles, informs the development of such benchmark models, and piques readers’ interest in petrol industry research.