BP not alone in price 'cross-subsidisation'

Tuesday, 1 May 2018

Nationwide retail chains all deploy some of the methods revealed at BP, a commentator says.

BP's 'cross-subsidisation' pricing tactic is being used by retailers across the country, experts say.

An internal email was revealed by Stuff this week, which showed a manager asking for prices to be increased in other lower North Island petrol stations, to reduce losses in more-expensive Ōtaki.

'We have already increased all three sites mentioned by 5cpl [cents per litre] and have found that the Z [Energy station] in Paraparaumu has already matched our pricing,' pricing manager Suzanne Lucas wrote.

'Over the next couple of weeks we will continue to try a number of tactics in the hope of reducing the pricing gap between Ōtaki and its surrounding regions.'

* Ardern warns BP: The usual explanations just don't exist

* Behind the pricing: Internal email lifts veil on BP's petrol prices**

Economist and commentator Shamubeel Eaqub said any retail chain that had uniform prices across the country was engaging in some level of cross-subsidisation.

That benefited shoppers in small centres that were harder to get to, because they would otherwise have to pay higher prices. But it meant shoppers in big centres paid more.

'In and of itself, it's not a problem. It's only when there is an abuse of market power - [it's okay] as long as they are not raising prices so much that everyone is worse off.'

Bodo Lang, head of marketing at the University of Auckland, said businesses that made the most money from their clients were in sectors with few providers to choose from, such as grocery retailing, where price structures were difficult to understand, such as real estate commissions, or in areas where customers were hesitant to switch, such as banking.

'If a market operates long enough at a certain price point then that becomes a reference point and prices tend to go only one way from there – up.'

He said it often took a new competitor entering the market to change pricing structures.

Even then, they were often at a cost disadvantage because they had the expense of starting a new business and also had to build a customer base.

'Often these renegades cannot take a big enough slice of the market quickly enough to become profitable themselves. Think back to Challenge gas stations for example.'

Other times they successfully carved out a market spot but decided not to compete on price because they had a cost disadvantage.

'Think Kiwibank for example.'

He said consumers had to send the right signals if they wanted change.

'If consumers do not walk away from poor performers then there is little incentive to perform better than competitors.

'In banking for example, switching rates are at a persistently low rate of around 5 per cent per annum, despite the fact that around 15 per cent to 20 per cent of bank customers are dissatisfied.

'As a result, banks like TSB Bank, the Co-operative Bank and Kiwibank – who all have more satisfied customers than other banks – collectively make up less than 10 per cent of the retail banking market. And that is after many years of operation.'