Strengthening of Competition in the Oil Industry in Greece: Lessons Learned from the Wholesale Segment

Image Credit: marselelia via Pixabay.

Michael Polemis

22nd February 2019

The Hellenic Competition Commission (HCC) in a previous Decision (No. 418/V/2008) launched a sector inquiry under the provisions of Article 5 of the Hellenic Competition Act (Law 703/1977) into the oil industry in Greece (e.g. refining, wholesaling, and retailing market segment), and claimed among others that oil companies (wholesalers) supported their filling stations (branded retailers) when competitors temporarily reduced prices to increase sales, requiring that the discount was passed on to the consumer (“price support” scheme).

Regarding the wholesale market segment, the HCC imposed the following behavioral remedies to enhance the level of competition in the market: (i) the wholesale companies that grant discounts (invoice and volume discounts) are obliged to clearly state the granted discounts on the agreements with their retailers (petrol stations); (ii) the wholesale companies must not grant any discount other than those mentioned on the invoices issued or the agreements under point (i) above; (iii) the wholesale companies must abolish the “price support discount scheme” they apply with the retailers; iv) the wholesale companies must clearly state the time period of the granted discounts on the invoices issued; v) wholesale companies are obliged to grant volume discounts (scale) to their retailers throughout the Greek territory without discrimination; vi) wholesale companies are obliged not to bundle the granted discounts with the investment payments made by them to their network retailers (branded petrol stations).

According to this type of discount, price support was not granted when a filling station (i.e. retailer) itself initiated a price reduction. The HCC argued that, as a consequence, filling station operators had no incentive to cut prices in order to initiate a price war and reach the Bertrand-Nash equilibrium. In such a case, not only they did not receive a discount, but also the operators knew that their competitors were able to follow any price reduction immediately. This raised competition concerns since this type of policy could be a focal collusive point by the wholesalers.

The main distortive consequences of granting such type of discounts are, that it: (i) may be discriminatory at the intra-brand competition level, in particular if company owned and company operated (COCOs petrol stations co-exist with other branded franchisee petrol stations, DODOs); (ii) may trigger collusive behavior since this can be achieved indirectly through discounts in a non-transparent way; (iii) may induce the minimum retail price reduction due to its limited geographic nature, and; iv) can be characterized as a vertical price fixing. These so-called vertical agreements, with the “price support” discount scheme result in higher retail prices and obstruct entry into the wholesale market. The abolishment of the “price support” discount scheme was fully adopted by the Ministry of Development (Ministerial Decision 2551/FEK B/16.12.2008) starting from 1.3.2009.

Table 1 depicts the retail price evolution along with the total consumption over the most basic petroleum products in Greece, starting from March 2009 until the most recent data (August 2018) drawn from the European Oil Bulletin. As is evident, petroleum final retail prices (tax included) are depicted with a small increase ranging from 0.15%-0.35%. On the other hand consumption of oil products has shown a significant decrease between the period 2009-2017, with heating oil showing the largest decrease (-60.7%) compared to automotive diesel oil (-11.45%) – mostly due to the economic crisis that hit Greece from 2010.

Overall, it seems that the imposition of the policy measures proposed by the HCC lifted some regulatory restrictions and enhanced the level of competition in the oligopolistic oil industry. In this industry, firms mostly compete in quantities/a la Cournot since they face significant capacity constraints (especially in the refining segment). The petroleum industry has changed significantly after the acquisition of the Shell and BP facilities to the two large domestic refiners; the refiners gained market power and imposed stricter credit policy on wholesalers. Effectively, the two refining companies appear to dominate the wholesale market since their overall market share nearly reaches 60-65%. Lastly, given how important energy is for the overall economy, better functioning of the fuel markets could help to boost overall competitiveness of Greece.

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Michael Polemis is an Assistant Professor of Industrial Economics at the Department of Economics, University of Piraeus, and a Member of the Hellenic Competition Commission, Greece. E-mail: mpolemis@unipi.gr

The views of this paper do not reflect the views of the University of Piraeus and the Hellenic Competition Commission. The remaining errors are the author’s alone.