Friday, March 29, 2024

Fewer players fuel concern

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MOTORISTS and other consumers may have concerns about competition in the aftermath of the merger between SOL and ESSO Barbados, given the further concentration of the fuel market.
The Fair Trading Commission (FTC) says pre-merger estimates of market concentration, based on sales volume, were notably high and have the propensity to raise competitive concerns.
“Activities post-merger will lead to further concentration of the market,” the FTC added, “although the number of brands would not change.”
The comments are contained in a summary report on the application for approval of the acquisition of Exxon Mobil assets here by Simpson Oil Limited (SOL) last August 26 and which was granted in October. It allowed SOL to acquire all of the retail, commercial, marine, aviation and distribution businesses managed by Exxon Mobil under the “ESSO” brand.
On the degree of control exercised by the enterprises involved in the merger, the FTC said that in examining the structure of the markets, consideration was given to the number and relative size of the firms in the market, and the barriers facing new firms seeking to enter. Attention was also paid to the level of consumer demand, including the degree of penetration.
“Retail sales volume figures (that is, volume of product sold) provide the most useful indication of relative market strength because these figures provide market share according to the particular product market (gasoline, diesel), the marketer, and location of the service station for any given period,” the report said.
(Owing to the commercially sensitive nature of the data supplied to the regulator, it presented market shares as percentage bands.)
The data showed Shell/SOL with 19 service stations (14 and five, respectively) or a total pre-merger market share of 44 per cent. Esso had nine service stations and 21 per cent market share.
But the combined entities’ market share jumps to 65 per cent post-merger on the back of a total of 28 service stations.
The major competitor, Rubis, had 12 service stations and a pre-merger market share of 28 per cent, which remained unchanged post-merger, while there were three other service stations that accounted for seven per cent of the market share before and after the merger.
The market shares of the marketers based on reported sales volumes of gasoline and diesel between June 2012 and August 2013 showed Esso in the 30 to 40 per cent band for gasoline; 50 to 60 per cent for diesel for a total of between 30 to 40 per cent. Shell/SOL was in the 30 to 40 per cent range for gasoline and between 20 and 30 per cent for diesel, for a total of between 30 to 40 per cent. Rubis was in the 20 to 30 band for gasoline and in the ten to 20 band for diesel for a total of 20 to 30 per cent.
The FTC concluded that market share based on the number of stations “is not synonymous with market share based on volume”.
“There is therefore a high degree of competition among the major players in the retail market,” it added. “Further emphasis is placed on the fact that the price competition does not feature in the market interactions and this points to other forces (non-price competition) that propel the competitive process therein.”
On barriers to entry, the FTC said it sought to identify features of the market that placed an efficient new entrant at a significant disadvantage compared with existing firms.
It reported that players in the upstream market (marketers or others who sell product wholesale to the dealers) as well as the downstream players (the dealers who manage the service stations) identified several conditions to entry which they considered barriers.
The major issues were:  High sunk costs: Significant capital and financial investments are needed to either outfit or operate a station. Costs are lower for the commercial supply of fuel since a company may only need a fuel truck and a pump.
 Legal/regulatory requirements: The lifting in 2012 of the Government moratorium on the number of service stations signalled that the market is open to potential entrants. Regulatory and administrative requirements related to the commercial and retail supply of fuel are, however, still present.
 Economies of scale: This becomes manifest for larger marketers with regard to their operational costs.
On the actual or potential competition from other enterprises and the likelihood of detriment to competition, the FTC noted: “Although it may be intuitive to equate high concentration levels with reduced competition as a result of fewer competitors, it may not automatically apply in this instance as behavioural issues are of more significance.
This assertion is supported by key characteristics that are peculiar to the auto-fuels market in Barbados.”
It pointed out that the location of service stations and the ease of egress and ingress are key determinants of the sales volumes and play an important role in the level of inter-brand and intra-brand competition.
Consideration of price tests and their impacts are of critical importance in merger analysis, the FTC said, defining price tests as those tests used to identify trends in the movement of market prices in order to determine if such trends are consistent with competition, with a monopoly situation or with collusion.
“In this merger, however, prices and margins are regulated and as a result marketers and dealers tend to compete on factors other than price,” it said.
“In practice, prices are set at the maximum allowable level. However, given the current regulatory environment, it is unlikely that there would be any detriment to competition and no foreseeable disadvantage to consumers.”
The FTC acknowledged the role brand plays in consumers’ choice of station, but said because of the conditions of the merger, “it is not envisioned that consumers would be limited in choice of branded fuel”.
“Also, as the market is regulated, it is not likely that consumers would be negatively affected by changes in prices initiated by the marketers.
“The commission recognises that benefits can accrue at the micro and macro levels such that the Esso branded stations remain and therefore consumer choices are not stymied and there are some efficiencies to be gained in employment and fleet management.”

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