The oil and petroleum industry in Malaysia operates under an oligopolistic market structure. Both PETRONAS and Shell are renowned firms that produce and sell petroleum in Malaysia. Incorporated on 17 August 1974, PETRONAS is Malaysia’s national oil company, assigned with complete ownership and control of the petroleum resources in Malaysia. Throughout the years, PETRONAS grew into a “completely integrated oil and gas corporation and is ranked among FORTUNE Global 500® largest corporations in the world” (PETRONAS, 2014).
Since 1981, Shell has been in Malaysia for over a hundred years. 19 years later, Shell produced Malaysia’s first barrel of oil. In 1910, Shell discovered Malaysia's first oil well. During 1914, Shell built Malaysia's first refinery in Miri and in 1963. Shell was also the first to take oil exploration offshore and discovered oil and gas in East Malaysia waters. Shell has become the petroleum retail market leader in Malaysia today, catering to one-third of West Malaysia and half of East Malaysia’s market requirements (Shell, 2014).
PETRONAS and Shell are both in the petrol industry and they operate in an oligopolistic market structure and are competitors to one another. An oligopoly market structure is a market structure where there are only a few suppliers in the market. Thus, they dominate the whole industry. PETRONAS and Shell are among the few major firms in the oil and petroleum industry in Malaysia and they each hold a huge percentage of the market share in the industry. Also, firms in an oligopolistic market produce either similar or differentiated products. PETRONAS and Shell produces and sell petroleum and are considered as a perfect oligopoly. As PETRONAS and Shell sells homogenous products, they compete through non-price competition.
Besides that, oligopolistic firms are interdependent and thus they have to consider their competitors reaction when determining the price, sales target and other business strategies. This is because a change in price or production by a single firm can directly affect the other firms in the industry (Deviga Vengedasalam. and Karunagaran Madhavan., 2010). Thus, PETRONAS and Shell cannot simply alter their prices resulting in price rigidity which is demonstrated thorough the kinked demand curve in Appendix A,FIGURE 1.1.
The degree of competition is very high within the industry in an oligopolistic market. This is due to firms trying to gain more market share within the industry. PETRONAS holds 42.7% of market share in the industry (from 2011 annual report) in Malaysia while Shell holds 1/3 of the market share in Peninsular Malaysia and 1/2 of the market share in East Malaysia (Thestar, 2013). Because of price rigidity, PETRONAS and Shell does not use price as a tool of competition but compete through non-price competition. This non-price competition include product differentiation, advertising, special offers and after sales services. The high degree of competition among...