Is the closure of gas stations the remedy for rising fuel prices?


Oil markets around the world are going through a difficult situation, due to the armed conflict in the Black Sea region. The increases in oil prices have been followed by increases in the prices of the different types of gasoline and diesel. The Mexican market does not escape the phenomenon, for which the government has understandably taken various actions to prevent price increases from occurring that reduce the purchasing power of the population.

However, it seems to me that after so much studying and discussing the problems of the fuel markets, there remains a lack of understanding of the dynamics of their operation. To make my point, I start from a situation that arose days ago and received significant media attention in Mexico City, due to the closure of a service station that sold a liter of gasoline for around 30 pesos. Economic theory establishes that, in a competitive market, the participants, companies and consumers, are price takers, that is, they lack the unilateral capacity to influence the supply and price of the product in question. In oligopoly markets, on the other hand, companies know that their actions are capable of affecting the profits of their competitors and they also know that the actions of those competitors will affect them.

According to information from January 2022, reported by Petrointelligence, in Mexico City there are 380 permits for the sale of oil products. Due to its extension, in Mexico City there is a high concentration of gas stations, since there is one for every 4 kilometers of surface. The capital city is, by far, the entity with the greatest presence of gas stations, followed by the State of Mexico, which has one gas station for every 19 square kilometers. However, the situation is different, if observed from the perspective of the population served on average by each service station. In this case, Mexico City is the entity with the greatest shortage, since for each gas station there are 24,237 inhabitants. In the State of Mexico, there are 14,725 inhabitants per station; in Nuevo León, 8,287; and in Jalisco, 8,797.

I do not know if a market of 380 gas stations can be considered a market close to perfect competition. However, it seems to me that a robust explanation would be needed to conclude that, in this context, the unilateral increase in prices by a competitor represents a risk to competition. It would be necessary to have a clear idea of ​​why, the action of competitors and consumers would be insufficient to counteract the action of that competitor.

Now, if that gas station kept its decision to sell at 30 pesos, and was successful, this would indicate the existence of a problem in the market, for which the company would not be responsible. If a company can persistently sell between 25 and 30 percent of the price of other competitors, and the market does not have natural monopoly characteristics, the conditions of entry must be reviewed and if there are barriers, they must be eliminated.

Price signals are, in short, the mechanism that attracts or repels investments in the markets. The way to address circumstances such as the one exposed is not through closures, but rather by identifying and eliminating those limitations that local authorities establish and that prevent the efficient functioning of the markets.

@javiernunezmel

Javier Nunez Melgoza

Consultant

Competition and Markets

Consultant in Economic Competition and Regulation, he is also a university professor.



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