The tale of two petrol stations.

[McDuck]

My old Economics teacher told me this tale.
He was formidable, and dedicated.

I suspect he's long since passed away.
His teaching continues.

There was a small petrol station, on the main dusty road that ran through the centre of a very small, very dusty township.
It was at the very northern tip of a farming peninsula.

It was a local family run affair, having once been the general store.
It had been that way for over 100 years.


Petrol sold for a dollar a gallon.
( He said gallon, so I'm going with it)

One day several trucks pulled up on the other side of the road.
They commenced to level the land and build a similarly sized store and pump court.

When that new store opened up, it sold petrol for 99C per gallon.
And most other items were also a cent off.

Loyalty meant the locals kept coming to their old familiar place.

The new store across the road dropped its prices to 3/4 that of the old store.

Business dropped off for the old store.
But, cleverly, they too cut their profit margins and matched the new store price.
Most customers returned to the old store.

The new store cut the prices down to half, now attracting customers like a magnet.

The old store did the same, but they were now making no profit, and living on savings.

The new store dropped prices to one third.

The old store closed.
The cost of buying the petrol and goods was higher than the price the new store was selling them at.

After the old store had well and truly shut its doors, the trick became apparent.

The new store changed it's branding and signage to reveal itself to be a very small branch of a very big petrol consortium.

The prices were then set to twenty percent higher than the original old store price.


Some say the locals got what they deserved for their treachery.
Some said that you can't stop progress.

I wondered if one big country would ever do it to a small country.
One store at a time.

[Learning]

AirNZ vs Pacific Blue.
ANZ milking the smaller regions to subsidize the main centers. Within two months of PB dropping out, ANZ's hiked up its prices.

[Don't believe the Hype]

No doubt it happens but this is an example of Predatory Pricing. There are laws against predatory pricing - the issue is proving it.

[Bob Kane]

After the old store had well and truly shut its doors, the trick became apparent.
The new store changed it's branding and signage to reveal itself to be a very small branch of a very big petrol consortium.
The prices were then set to twenty percent higher than the original old store price.

Why didn't the old store re-open and sell petrol at this new 20% higher price?

[Beano]

They could not as they sold their property on "property genie " for 20pc more than market and retired rich.
As for the buyer of the store he overpaid and went broke. :-)

[Perry]

No doubt it happens but this is an example of Predatory Pricing. There are laws against predatory pricing - the issue is proving it.

Didn't work against CHH, as I recall. The pink batts case went all the way to the Privy Council, didn't it?

[Bob Kane]

They could not as they sold their property on "property genie " for 20pc more than market and retired rich.
As for the buyer of the store he overpaid and went broke. :-)

So a new smart investor snapped it up for a song and is now selling petrol at the new 20% increased price and making a fortune.
I'm not sure what the point of the story is.
It's describing market forces but treats a circle as if it were a straight line.

[Don't believe the Hype]

The story is a good lesson in short term incentives and how people treat value.

Something that once well understood can be leveraged to great advantage.

[Perry]

I'm not sure what the point of the story is.
It's describing market forces.

How do you define "market forces?"

[Learning]

If all the customers who saved money during this price war pooled their savings they could buy their own petrol station and all.live happily ever after. :-)