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  • This assignment has 4 questions about given newspaper article which is related to ECONOMICE for BUSINESS. The article title is 'Julian Segal says Caltex to maintain strategy, as ACCC opposes Mobil bid'. Each question should have 200words answer and quest

This assignment has 4 questions about given newspaper article which is related to ECONOMICE for BUSINESS. The article title is ‘Julian Segal says Caltex to maintain strategy, as ACCC opposes Mobil bid’. Each question should have 200words answer and quest Essay Example

[Type the company name]

CALTEX VS ACCC

Effects of oligopoly.

5/1/2011

This assignment is about the effects of oligopoly in the oil sector in Australia. It covers how ACCC tries to deal with unfair competition in the market

Contents

3QUESTIONS

3Question 1

4Question 2

5Question 3

8Question 4

10Conclusion

11Reference

QUESTIONS

Question 1

  1. The ACCC chairman, Graeme Samuel, believes that the fuel market is characterized by a “comfortable oligopoly”. Consider the characteristics of different market structures and using information from the article, your knowledge of the industry and concepts from the lectures, briefly discuss whether you agree with Mr. Samuel’s opinion and why. (3 marks) [200 words]

Answer

Oligopoly is a market situation whereby supply of a given commodity is controlled by a few numbers of suppliers who can influence the price of a given commodity at any given time thus having a direct effect on the prices of the competitor.

I agree with the opinion of the ACCC chairman, Graeme Samuel, because if Caltex is allowed to purchase Exxon Mobil, the number of competitors in the fuel market will reduce. This will lead to Caltex being in a position to control the number the market prices; regardless of whether the demand is elastic or inelastic. Reduced retail competition in the market ultimately leads to higher prices to the consumers.

Generally, the less companies in the industry, the easier it is to form a cartel. Therefore, ACCC should continue striving for more players in the market, not less; more competition in the market, not less. This is for the benefit of both the economy and for the customers.

Question 2

  1. Briefly outline the role of the ACCC generally with regard trade practices law. What investigations has the ACCC undertaken in fuel markets? Interpret the ACCC’s decision not to allow the Caltex takeover. What factors do you think were considered and why? (3 marks) [200 words].

Answer

The main role of ACCC is to ensure that businesses do not mislead or deceive, or engage in any anticompetitive conduct through education, publications and the media. This is outlined in the Trade practice act (1974). If any company breaches the law, ACCC the rights to fine it or declare some contracts void.

. The investigation involves comparing monthly prices before in Western Australia Cole entered the market. In august 2007, ACCC did another investigation about the prices of unleaded petrol. It was submitted to the Queensland Government.(Davidson, July 2008) was released in 2008 by the Institute of Public Affairs A critique of the ACCC analysis of the FuelWatch Scheme,ACCC has done many investigations in the fuel market. One of them,

ACCC’s decision not to allow Caltex to buy Mobil was just an exercise of their rights. Chapter IV of the Act prohibits anti-competitive conducts. Caltex buying Mobil may lead to absolute prohibitions such as price fixing and misuse of market powers. Eventually, this can lead to elimination or damaging of the competitor. If Caltex was allowed to purchase Mobil, possibility of cartel activities cannot be ruled out. Chapter 45 of this Act prohibits cartel activities in the market.

Question 3

  1. Briefly outline the Prisoner’s Dilemma model of oligopoly. Within the context of this model explain what you think might have happened, and why, had Caltex been allowed to purchase the Mobil service stations. Use the idea of a Prisoner’s Dilemma with two petrol stations next to each other, one Mobil and one Caltex, and how they may have strategically interacted before and after the takeover. (5 marks) [200 words + diagram(s)]

Answer

In oligopoly, the profit of each company depends on the action of the other company offering the sane commodity. Thus a company is a ‘prisoner’ of another company. In the prisoner’s dilemma, it is difficult for these companies to co-operate on a decision even if it is for the benefit of both the companies. Each player selects its own strategies for personal gains. Eventually, every company is a loser because no company makes maximum profit out of it.

Before the takeover, with Caltex and Mobil situated next to each other, they would scramble for customers. As a result, competition would be very high. This will have made make the two companies intensifies advertisements in the media which of course they use a lot of money. Also, as a result of stiff competition, each company would have reduced the prices of fuel significantly so that it harnesses more customers. Consequently, equilibrium would have been reached where each company becomes worse off economically. This situation can be explained by the aid of table 2.1.

Fig 2.1: variations of prices of leaded petrol in a Caltex and Mobil station.

Day of week

Caltex Quantity

(litres/day)

Quantity Mobil

(litres/day)

Caltex Price

($/litre)

Mobil Price

($/litre)

$)Caltex adverts cost (

$)Mobil adverts cost (

Wednesday

Thursday

Saturday

After the takeover by Caltex, we assume that Mobil will go and invested in another country. The variation of prices will be as shown in table 2.2.

Fig 2.2: after the takeover.

Day of week

Caltex Quantity

(litres/day)

Quantity Mobil

(litres/day)

Caltex Price

($/litre)

Mobil Price

($/litre)

$)Caltex adverts cost (

$)Mobil adverts cost (

Wednesday

Thursday

Saturday

These sets of random data can be used to approximate the basic profit made by each company before and after the takeover. The results are used to plot the figure shown in fig 1.

This assignment has 4 questions about given newspaper article which is related to ECONOMICE for BUSINESS. The article title is 'Julian Segal says Caltex to maintain strategy, as ACCC opposes Mobil bid'.
Each question should have 200words answer and quest

Fig 1: variation of gross profit across the week (before and after the takeover).

Blue-gross profit for Caltex before the takeover.

Red-gross profit of Mobil before the takeover.

Green- gross profit of Caltex after the takeover.

Purple-gross profit of Mobil after the takeover.

Question 4

  1. An issue which has led to complaints against fuel retailers is the fact that prices follow a weekly cycle. For example, prices are often higher on Saturdays and lower on Tuesdays. Suppose you are a petrol retailer and are presenting an argument to the ACCC that this is perfectly reasonable and does not reflect collusion. You have collected the demand information shown in the table below and can show you have a constant marginal cost of $0.90/liter. Show that a profit maximizing firm would charge a higher price on Saturday than Tuesday. Illustrate with a diagram. Why might demand systematically differ across days of the week? (4 marks) [200 words + diagram(s)].

Answer

Profit maximization deals with making the profit as great as possible. It is usually determined by two common methods: total revenue-total cost method and the marginal revenue-marginal cost method (Samuelson, 2003). The total revenue-total cost approach defines profit as revenue minus costs while the marginal revenue-marginal cost method defines profit ads marginal revenue minus marginal costs. As a result, marginal profit is positive when marginal revenue exceeds marginal costs while marginal profit is negative when marginal revenue is less than marginal costs (Landsburg, 2002).

For each given case, the marginal profit was calculated and the result tabulated as shown in table 2.3.

Table 2.3: variation in marginal profit on Tuesday and Saturday.

Quantity

(litres/day)

Saturday Price Schedule

($/litre)

Tuesday Price Schedule

($/litre)

Marginal profit on Saturday

Marginal profit on Tuesday

0

0

0

0

The above table was used to plot figure 2 below.

This assignment has 4 questions about given newspaper article which is related to ECONOMICE for BUSINESS. The article title is 'Julian Segal says Caltex to maintain strategy, as ACCC opposes Mobil bid'.
Each question should have 200words answer and quest 1

Fig 2: plot of marginal profits on Tuesday and Saturday.

Conclusion

The role of ACCC is welcomed because it instills competition in the oil market. Prisoner’s dilemma is here to stay between business competitors although its more harmful to their businesses.

References

Davidson, S. (July 2008). Submission to the Senate Inquiry into. Institute of Public Affairs , 1-9.

Landsburg S. (2002). Price theory and application (fifth edition). south-western.

Samuelson, s. (2003). Managerial Economics (fourth edition). wiley.

www.accc.gov.au/content/index.phtml/itemId/904296

http://www.theaustralian.com.au/business/industry-sectors/julian-segal-says-caltex-to-maintain-strategy-as-accc-opposes-mobil-bid/story-e6frg9h6-1225806209943