Why is supermarket petrol in the UK cheaper than… | tutor2u Economics
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Why is supermarket petrol in the UK cheaper than other brands?

In recent weeks we have heard numerous stories of supermarkets engaged in price wars on the forecourt. The price of a litre of petrol has - in some localities - fallen below £1 and further price cuts are expected with global oil prices dropping to an eleven year low.

One aspect of the market for petrol and diesel in the UK is that supermarket prices are consistently below that of the UK average. The data below tracks the monthly average price.

Statistic: Comparison of the price of diesel from supermarkets and petrol stations in the United Kingdom (UK) between January 2014 and December 2015 (in pence per liter) | Statista
Find more statistics at Statista

Why is the price per litre of petrol and diesel consistently cheaper in supermarkets compared to the UK average - here are some thoughts:

  1. Supermarkets have buying power (monopsony power) in the wholesale fuel market and can negotiate lower prices. Some supermarkets do not have long term purchase contracts and look to buy petrol and diesel in wholesale markets at the lowest price they can
  2. They are happy to accept lower profit margins on each litre sold as a strategy to get people into their stores - in some cases this might come close to loss leading (pricing below unit cost) and at the very least it involves a satisficing approach
  3. They can run petrol stations at lower cost because they already own the sites and they can strip out other costs by stocking their shops with their own brands
  4. The average price per litre includes the prices of many smaller independent petrol retailers whose prices are always higher because of a lack of economies of scale. That said the number of independent retailers has been in steep decline over the last 20 years
  5. Is supermarket petrol inferior to branded / premium fuels? All fuels sold in the UK conform to relevant standards but a debate rages on online motoring forums about the relative efficiency of supermarket fuels.

Statistic: Market share of motor fuel sold in petrol stations in the United Kingdom in 2014, by brand | Statista
Find more statistics at Statista

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