Case (1) ExxonMobil
1. Which, if any, of the pricing strategies discussed in the chapter are being applied by ExxonMobil and other oil companies? Could they adopt any other strategies?
ExxonMobil and other companies in the retail oil industry are working in monopolistic competitive market. The market demand in oil industry is inelastic in short run and all the companies have their own share in oil demand. In the monopolistic competition like in the case of ExxonMobil and other retail oil companies, prices are usually set by the forces of demand and supply prevail in the market. However, companies in this situation usually try to gain maximum profits and they also want that all of their products would be sold out. In fact, ExxonMobil makes a differentiation strategy. It is because ExxonMobil has to make segmentation of its consumers on the basis of their location. Prices of ExxonMobil are also determined by considering time behavior of the petroleum products. This pricing strategy also suits to other oil companies because those are also working in the monopolistic competitive environment and these companies also want to make maximum profit in the environment where demand and supply forces are also effecting on the determination of prices (Bajariand and Benkard, 2005).
2. Discuss buyer reactions to changes in the gas prices. How can you explain these reactions?
Gas prices are largely dependent on the forces of supply and demand. It is because this petroleum product market is relatively inelastic in its demand. Buyers have to purchase the gasoline products whoever the price would be in the market. However, the socio-economic response of the buyers is not as much favorable. It is because, in present times, whole the life of a person revolves around the transportation and transportation cost. Whole the economy goes slow if there is an excessive increase in gas prices. It is likely from buyers that they try to reduce the use of gas purchase but its demand is almost inelastic. So there are more socio-economic reactions than the economic behavioral responds. Buyers would likely to make agitations against the price hike. Gas companies would be the target of social activists and the buyer groups in such price hike decision (Chamberlin, 1933).
3. How should ExxonMobil react to gasoline price changes by other large and small oil companies? Can ExxonMobil keep its prices stable (or even lower them) when the market price is increasing? Should it?
There exists the monopolistic competition behavior in the market of gasoline products. However, if ExxonMobil wants to take advantage of the price hike, it can lower the prices of its gasoline. For this purpose, ExxonMobil can follow the loss leader pricing strategy. This strategy would help the company in stimulating sales of other products. The other option that ExxonMobil can exercise in the instance of price hiking by other companies is to keep stable its price level. However, the second option would likely not be as much helpful for ExxonMobil in taking advantage of this price hike(Blumberg,2002). It is because in inelastic demand, buyer would likely to purchase the products if they would find even little associated savings. It is basically a psychological buying behavior that they try to give favor to the companies who have lower prices in competition (Eckert, 2003).
4. Consider the public policy issues within and across channel levels of the oil industry. Is ExxonMobil acting illegally or irresponsibly by reaping record profits while consumers are hurting at the pumps?
At channel levels, there are highly vertical integration exits in the operations of oil companies. It means that most of the oil giants have their own crude oil extraction sites. They also have oil refineries and storage and distribution channels....
References: Bajari, P., and Benkard, L.(2005) “Demand Estimation with Heterogeneous
Consumers and Unobserved Product Characteristics: A Hedonic Approach,” Journal
of Political Economy, 113 (6), 1239–1276.
Barron, J. M., Taylor, B. A., and Umbeck, J. R.(2001) “New evidence on
price discrimination and retail configuration,” Applied Economics Letters, 8(2),
Blumberg, G. P. (2002) “DRIVING My Gasoline Beats Yours (Doesn’t
Chamberlin, E. (1933)The Theory of Monopolistic Competition. Harvard University
Dahl, C., and Sterner, T.(1991): “Analysing gasoline demand elasticities: a
survey,” Energy Economics, 13(3), 203 – 210.
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