There is an email doing the rounds encouraging us all to boycott Esso and BP as a way to protest about high fuel prices. It is a version of a 2001 email that resurfaces from time to time in slightly modified forms.
I thought about this on Sunday and emailed the following to a friend. Have I got it right?
If some people decided for non-price reasons to avoid Esso and BP, why would they drop their prices? If we assume only boycotters switched suppliers, a price drop from BP and Esso would have no effect – boycotters would still boycott. If marginal consumers choose suppliers for non-price reasons, there is no market mechanism to push prices down at Esso and BP. The boycott might hurt Esso and BP, but would not make their petrol any cheaper – so would only make sense as a protest against something other than the price of petrol.
Moreover, it would not only be boycotters that would switch suppliers as we have assumed. The English petrol market is quite competitive, because there are lots of suppliers and lots of petrol stations. Stations compete on petrol price, location and quality of shop, but in the short term (i.e. the likely duration of a boycott) only on price. If other petrol stations faced less price competition because some customers were boycotting BP and Esso, they would be able to raise prices. Some of their more price-sensitive customers would then switch to BP and Esso. But BP and Esso would also be able to raise their prices a little and still be cheap enough to attract switchers. At the same time, other suppliers would drop their prices a little because of the lost custom… and so on until the market found a new, higher, equilibrium.
The key point here is that, even if the proposed boycott was effective enough to hurt the revenues of BP and Esso, by decreasing price competition and introducing brand competition in the petrol market it would drive up the price of petrol.
People have always tended to blame rising prices on predatory suppliers – cf. the reaction of the English population to inflation during the Napoleonic wars. If you think the petrol market is not competitive, the thing to do is write to the OFT about it. I think it is competitive, and therefore that the predatory-suppliers argument does not stack up. Rising energy prices are a global phenomenon and there is not much that English service stations can do stop it.
Update: The Napoleonic inflation is the subject of The Rigs of the Times, an old song recently recorded by Bellowhead.