The UK petroleum industry consists of 3 main retailing ownership models. The 3 models are oil company, independent dealers and supermarkets. The concentration ratio in the petrol retail market has gone through a couple of changes over the past 10 years. Since 2004, the market share of supermarkets has increased by 10%, from 29% to 39%. In the same period, the market shares of oil companies and independent dealers dropped by 8%, from 37% to 29% and 1.6%, from 34% to 32.4% respectively. (UK petrol and diesel sector, 2013: 44-45). Please refer to Appendix A for the graphs. If we look at the market by types of ownership, it seems like oligopoly as 3 types of ownership dominate the industry. However, if we break it down into individual companies, the statistics reflects the opposite. Using the Herfindahl – Hirschman Index where the market share of each firm is squared and added up, we can find the market concentration of the UK petrol retail. (Modern Analyst, 2013)
Please refer to Appendix B for the table and values.
HHI = 16 ² + 15² + 14.1² + 10.4² + 9.7² + 9.4² + 6.1² + 5.4² + 4² + 2.4² + 2.4² + 1.2² + 1.2² + 1.1² + 0.7² + 0.5² + 0.2² + 0.1² + 0.1² + 0.1²
As the HHI value is between 1000 and 1800. The UK petrol retail market is considered moderately concentrated which indicates that it is more towards monopolistic competition than oligopoly.
Although independent dealers make up 32.4% of the petrol market share, they own 59.9% of the forecourts in the UK. Oil companies and supermarkets own 25.5% and 14.6% of the forecourts in the UK respectively. (UK petrol and diesel sector, 2013: 45). Please refer to Appendix C for the graphs. Even though supermarkets own the least amount of the forecourts, they have the highest market share in terms of petrol sold out of all the retailers. This shows that supermarkets have a larger volume of petrol in their stations and possibly more refuelling pumps in each station. It can be inferred that supermarkets are able to do bulk purchasing due to their spending power. Thus, it proves that there are barriers to entry for the UK petrol retail market in the form of economies of scale. Besides economies of scale, other barriers to entry such as low profit margins have discouraged potential owners. As tax accounts for almost ¾ of petrol prices, newcomers would have difficulty competing with established companies, as they cannot afford to follow the prices set by the large firms (Sully, 2008).
The Office of Fair Trading reported that oil companies are trying to exit the UK retail market. An example would be Total selling its forecourts to Rontec Investments and Murco’s forecourts being put up for sale for over a year (UK petrol and diesel sector, 2013: 46). Looking at the history of the UK petrol market over the last 10 years, we can infer that oil companies will continue reducing their market share while supermarkets will continue the expansion of their forecourts. This will reduce the petrol competition in...