The Commerce Commission has released two working papers outlining its approach to assessing profitability and the key focus areas it is considering in its study of New Zealand‘s retail fuel markets.

Last December the commission began a market study looking into the factors that may affect competition for the supply of retail petrol and diesel used for land transport throughout New Zealand.

The first paper outlines the focus areas for the study into factors affecting competition in ways that may not be in the long-term interests of consumers.

The commission said it intended to focus its analysis of competitive outcomes in retail fuel markets on three main areas – the profitability of the firms operating in New Zealand; regional variation between price and margins, including the effect of competition; and the pass-through of changes in input costs to retail prices.

“Variations in regional prices and margins will also be analysed. Differences in regional prices are a well-identified feature of New Zealand fuel markets. We will seek to understand this dynamic. For example, do prices and margins differ depending on which competitors are present in a region? Does shared control of, and restriction of access to, key infrastructure affect competition in certain geographic areas?” the report asked.

The commission would also focus on factors affecting competition, such as structural conditions for entry and expansion; infrastructure sharing; wholesale supply arrangements; consumer behaviour and firms‘ pricing strategies; and coordinated behaviour among firms.

“Why do retailers use selective price discounting, loyalty and bundling strategies, and how do consumers respond to these? Why has discounting increased, and why have importer margins risen at the same time?”

The commission said the rise in retailers‘ use of pricing strategies such as selective discounting, loyalty and rewards programmes may benefit some consumers, but could also make it harder for consumers to make well-informed decisions and increase their search and switching costs. If some consumers have difficulty comparing prices, or switching to better alternatives, then retailers may not have to compete as strongly to attract and retain them.

The second paper explains the commission‘s proposed approach to assessing profitability in the retail fuel sector. It discusses the insights that might be obtained from a profitability assessment and the potential limitations of it.

The commission said profitability tended to vary over time, and that high levels of profitability over short periods of time do not necessarily indicate a problem with competition. More concerning from a competition perspective would be indications that levels of profitability have significantly and persistently exceeded a normal rate of return. If the commission finds that excess returns are being earned, it will then consider whether they have persisted over time.

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