The Effect of Market Isolation on Competitive Behavior in Retail Petrol Markets

Round 1

Reviewer 1 Report

Hello,  This is a well executed piece of research but it leaves me with several questions that you should address in your revision. If there is a known cycle and therefore an inefficiency in petrol prices why has it not been arbitraged?  Petrol of course is storable and according to efficient market theory, if only some of market participants are aware of a reliable pattern, it should disappear.  Second, according to Samuelson, amuelson (1965) formulated the proposition that futures prices are more volatile the closer a particular contract is to expiry.  You need to reconcile your findings with received theory including Efficient Market Theory. Remember, the fact that you can feit a model to historic prices does not imply predictive value.  Moreover, even if there is a pattern in petrol prices, I don't see the connection to petrol alternatives. How does your paper have any policy implications.  Petrol prices are highly correlated to crude oil prices and commercial users have great scope for risk managing their exposures. Further, the weekly price pattern observed we do not see huge differences and green alternatives are very expensive given the vast distances faced by the Australian motorist. Anyway, I am encouraging you to resubmit after addressing these issues.

Author Response

All comments answered carefully

Author Response File: Author Response.docx

Reviewer 2 Report

This study presents an estimation of petrol price cycle in Perth using Markov regime-switching model and the Edgeworth’s theory. The study is interesting and the results can be useful for policy makers as well as citizen. However, I have the following adverse comments as follows.

1. The necessity to conduct such study is not well documented, and the questions asked at the introduction is not that much strongly desirable, which makes this study more like a message on newspaper.
2. The structure of the paper is not like an academic one, as the finding and conclusion are directly put forward at the introduction and the readers have no interest for the remainder text.

Therefore, I suggest a revision of it before resubmission.

Author Response

All comments answered carefully

Author Response File: Author Response.docx

Reviewer 3 Report

The manuscript is well written following a good research work on fuel pricing.

I have a few minor comments:

1. My view is that Lines 10 -17 are better suited for the introduction rather than abstract. The authors could lose them and still maintain the abstract quality/messaging 100%.
2. The authors should consider including some quantitative results from the study in the abstract
3. What are the implications of potential price fixing via collusion by marketers?

Author Response

All comments were answered carefully

Author Response File: Author Response.docx

Reviewer 4 Report

The topic of this paper is impressive. The study has potential to contribute to the existing literature. However, the prevailing manuscript has needed some more revision.

1. Background and Literature section seems to be overlapping in terms of references; the authors should identify and eliminate them appropriately.
2. The authors should provide a summary table of the previous empirical works in chronological order.
3. Methods: sound
4. Results: sound
5. Interpretation: Interpretation of the results seems correct.
6. The quality of the figures is also not at all up to publishable standards.

Author Response

All comments were answered carefully

Author Response File: Author Response.docx

Round 2

Reviewer 1 Report

Although some previous concerns have been addressed your article still has problems. I suppose the isolation of the Perth market plus the inability of consumers either resell their petrol or purchase sufficient quantities avoid the most expensive days, is a lesson here and therefore suggest as I explain below, what should be the key message of your work.

Now, I do not  think the small weekly variations in prices should be confused with the larger issues of petroleum market volatility. It takes months from crude oil being produced and refined to becoming petrol.  Your weekly price cycles are only a 30% swing. There may also be local pricing differences within a city plus time of day effects. Petrol sold on motorways tends to be higher than petrol purchased in town because there is less competition. Second, there may also be time-of-day effects.  Petrol purchased after 20:00 is usually purchased by someone who is travelling that evening or needs it for the next morning. These two possibilities have been ignored.  (I once worked for BP and we invented time-of-day pricing.)

You are making big mistakes on the consumer welfare aspects of your paper and are clearly ignoring basic Consumer Welfare Choice Theory.  So, you need to fix the article in this respect.  If someone pays more on a Tuesday than on a Wednesday, that does NOT mean his or her consumer welfare is reduced. Evening tickets for a show cost more than a matinee performance. It is the same show but when it is delivered is not.  On Wednesday purchasing fuel may be perceived as more useful than purchasing it a day earlier.  Therefore you are wrong that consumers are worse-off purchasing fuel when prices are  higher.  They are worse-off monetarily but that has NO meaning. The issue is one of consumer welfare. Formally, does the Marginal Rate of substitution between Tuesday fuel and Wednesday fuel = the ratio of Tuesday Fuel to Wednesday fuel.  Back to basic Micro Economics please.

Anyway, your research is narrow but valid as an empirical result. I do NOT think it should be related to any larger issues like Renewable Energy.  Getting back to basic micro, I see nothing wrong with different prices on different days. Critically, markets are setting prices.  Are petrol firms earning supra-normal returns?  Do prices exceed marginal costs?  These would be hall-marks of market failures. So, the title needs to be changed and should be something like the effect of market isolation on competitive behaviour in retail petrol markets.  You could bring in  location theory, etc. 

Author Response

Dear Reviewer, thanks a lot for your comments. We have done all comments.

Author Response File: Author Response.docx

Reviewer 2 Report

The comments have been replied to properly, and I have no further comments. 

Author Response

Dear Reviewer. Many thanks for your time spent on this paper.

Author Response File: Author Response.docx