Economic Principles -- Perfectly Competitive Markets Generally,

Economic Principles -- Perfectly Competitive Markets

Generally, gasoline and related petroleum products intended for automobiles are all products whose sale in the United States represents a close approximation but not necessarily an exact model of a perfectly competitive market. That is because entering the market is not completely barrier-free in that it requires a significant investment of capital. In that regard, the primary barrier to entering the market is the overhead cost associated with establishing the gas station facilities and qualifying for government licensing.

However, that is not substantially different from many other industries or even the simplest markets because virtually every business in modern American society requires the purchase or lease of land or facilities. Therefore, the existence of these barriers is not, in principle, enough to take gasoline and petroleum sales out of the perfect market description because the barrier is equally surmountable by anybody with sufficient capital to start any commercial business enterprise in the same community. Provided the proprietor has the necessary capital, anybody can open a gas station and begin selling gas and other petroleum products such as motor oil. The consumers who purchase gasoline and other petroleum products are almost exclusively automobile owners who drive their vehicle regularly. Domestically, the sellers are the major oil companies at the wholesale level and the gas station owners at the local level.

Gasoline station owners are price takers rather than price setters because they all purchase their gasoline at either the exact same price or very close to the exact same prices set by their wholesale suppliers. The wholesale prices of gasoline are set by overseas suppliers and, increasingly, by fluctuations in the price of crude oil attributable to market speculation on Wall Street. As a result, local gasoline sellers experience price fluctuations caused by large investment in oil futures by market participants who may never actually take possession of any oil products at all but who only own them on paper. The federal government does not allow unrestricted speculation of this nature but many analysts and consumers believe that those controls are insufficient as evidenced by price increases that correspond to demand and to civil unrest internationally that, in fact, should not affect gas prices substantially. Gasoline products are highly standardized in the sense that they are subject to government oversight for purity and quality and in that they are heavily regulated through mandatory compliance with taxes and licensing laws at both the state and federal level