QUESTION 2

The petrol industry in Dubai has become increasingly concentrated in recent decades. The number of firms in the industry has dropped by 40 per cent since a 1999 peak, while the remaining firms swelled in size. In order to enter the industry, the owners of the companies must have significant capital at their disposal, and they consider the impact of their decisions on competitors and the reactions of their competitors to themselves.

Older firms tend to rest on their laurels, having little incentive to innovate. They spend less on research and development, acquiring growth through mergers or acquisitions and expanding margins by raising consumer prices. As of 2020, Cyril Tech has become the largest player in the market, providing 80 per cent of the petrol output. The remaining players control 20 per cent of the output.

a) State what market structure existed in the petrol industry subsequent to 1999. Can excess profit be earned in this industry in the long run? Explain.

b) State what market structure currently exists in the petrol industry since 2020. Illustrate and explain how equilibrium is determined.

c) Are the firms in the petrol industry operating efficiently (1) subsequent to 1999; and (2) presently? Explain.

d) Ollio Chem and Petrodub are two petrol companies that are following the price leadership of a particular firm when determining their pricing strategy. Define this type of behaviour and explain ONE advantage and ONE disadvantage of this proctice.