The Chinese Petroleum Corp (CPC) and Formosa Petrochem-ical Co -- the nation's two leading oil products suppliers -- recently raised the prices of their oil products in response to rises in the international price of oil. However, the National Petro-leum Corp (NPC), a large gas-station chain, went on the offensive, cutting prices at the stations it supplies in central Taiwan.
National's NT$2.2 cut in the price of a liter of gasoline and NT$0.8 cut in the price of diesel prompted CPC and Formosa to respond. Two days later, CPC cut the price its gasoline by NT$2.2 a liter and Formosa by NT$2.5 at gas stations in central Taiwan. Esso Petroleum Taiwan immediately followed suit, cutting prices by NT$2.2 per liter at its stations.
Whether the price war is a result of pure marketing strategies or sophisticated calculations by gas station chains -- aimed at attacking independent stations -- such competition was impossible when the CPC was a monopoly. This new cut-throat competition demonstrates how downstream retailers, as well as suppliers, now also have power over the prices they charge.
Upstream gasoline suppliers are in a state of oligopolistic competition. In a price war, they may easily collude or compromise with one another very quickly for the sake of their common interests. For example, CPC and Formosa have very similar prices, so much so that when they raised prices recently, there was a NT$0.2 per liter price gap for only two days.
On the other hand, the num-ber of small-scale downstream gasoline retailers is large. They are in a state closer to perfect competition. Since their products are similar, a price war will result in a round of consolidation as inefficient retailers go bust, after which prices will stabilize and end up almost equalized between the companies.
This round of price cuts, launched by downstream gasoline retailers, has highlighted the change in the market structure of Taiwan's oil business, as well as the transformation of the relationship between upstream and downstream companies.
Consumers are surely glad to see prices fall. However, such price competition among downstream gasoline retailers does have a bottom line and a time limit. In fact, it all depends on resources provided by their upstream suppliers.
Leonard Wang is the chairman of the department of applied economics at National University of Kaohsiung.
TRANSLATED BY EDDY CHANG
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