The ACCC's FuelWatch scheme will place draconian limitations on price competition within the retail market for petrol. But petrol stations will still compete and the ACCC will soon discover that FuelWatch makes petrol pricing less, rather than more, transparent.
At present petrol retailers compete on price and on promotions. The dominant form of competition, however, is in the form of price competition. That is likely to rapidly change to promotions. This change in corporate behaviour is likely to result in less transparent pricing, increased transaction costs, and will increase the price of petrol sold to those individuals least able to fully participate in promotional schemes.
At present some supermarkets and retail outlets provide dockets allowing shoppers to redeem 4c a litre from a petrol purchase. Some petrol retailers augment that 4c with an additional amount if the customer makes a trivial purchase at the petrol retailer.
All of these docket schemes require the customer to spend a predetermined amount at specific retailers before participating. To the extent that petrol prices will now be fixed, these docket schemes will become more valuable. As they become more valuable, the potential for them to be used as a method to increase product competitiveness also increases.
At present the docket scheme consists of a barcode printed at the end of a receipt. But it is easy to imagine that supermarket chains could create full-blown loyalty programs with cards (much like the current "Fly-Buys" card system). Indeed Woolworths has just completed a trial of petrol cards in NSW. That scheme could be very easily extended.
Consumers could accumulate "petrol points" on their cards and subsequently redeem those points at their next petrol purchase. At present a 4c docket is issued every time a customer spends more than $30 in a store. A more sophisticated system, however, could easily evolve whereby points are accumulated according to the total spend. The technology to introduce such a scheme already exists.
Given that high-income individuals spend more than low-income individuals, the impact of this change is likely to be regressive. Low-income customers will have fewer points to redeem and so will face higher effective petrol prices. Essentially the rich are more likely to get cheaper petrol at the expense of low-income earners.
Furthermore, there would be nothing to stop petrol retailers from offering a time-varying conversion rate for petrol points. Those petrol retailers with high prices could offer a higher discount per petrol point. Similarly, those retailers with low prices could lower the discount per petrol point (of course, they could also simply declare some or all of their pumps to be "out of order"). Uncertainty about petrol prices could transfer to a focus on uncertainty about petrol points and the discount to the consumer.
A national FuelWatch scheme would encourage the development of loyalty schemes that would tie individual customers to particular, and existing, retailers. This is likely to increase any market power that those existing retailers already exercise. It could also result in individual motorists being less willing to shop around for the cheapest petrol -- the loyalty scheme, as indicated, would be more valuable than the current docket scheme. It is not clear that the ACCC has a brief to enhance the market power of existing firms.
Generally consumers would prefer firms to compete on price and not on loyalty schemes. After all, the cost of loyalty schemes is factored into the price of products consumers buy. The ACCC now argues that FuelWatch is only supposed to enhance price transparency, yet if non-price competition becomes dominant in the market price transparency will be obscured.
The FuelWatch scheme is likely to transfer competition from price to non-price considerations. That reduces the transparency of the market and disadvantages those consumers who would prefer a lower price to an enhanced loyalty scheme. The unintended consequences of the FuelWatch scheme will be to increase existing barriers to entry, increase market power of existing retailers and disadvantage those consumers who buy their petrol at the bottom of the pricing cycle.
In order to protect the "integrity" of the FuelWatch system, the ACCC would have to prohibit competition for petrol in both pricing and promotional terms. This highlights the fundamental problem with FuelWatch. In order to prevent petrol retailers from raising their prices the ACCC needs to prevent retailers selling cheap petrol.
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