The Commerce Commission is outlining how it will study the profitability of New Zealand's retail fuel markets.
The country's competition watchdog has released two working papers for the market study launched in December. The first outlines its focus areas for the study into factors affecting competition in the market.
The commission said it wanted to focus its analysis of competitive outcomes on three main areas - the profitability of the firms operating in New Zealand, regional variation between price and margins, including the effect of competition, and the pass-through of changes in input costs to retail prices.
"We will seek to understand this dynamic. For example, do prices and margins differ depending on which competitors are present in a region? Does shared control of, and restriction of access to, key infrastructure affect competition in certain geographic areas?"
Its study would look at the structural conditions for entry and expansion, infrastructure sharing, wholesale supply arrangements, consumer behaviour, firms' pricing strategies and co-ordinated behaviour among firms.
The commission said it would look at why retailers used selective price discounting, loyalty and bundling strategies, and how do consumers responded. "Why has discounting increased, and why have importer margins risen at the same time?" It said the rise in loyalty and rewards programmes could make it hard for some consumers to make well-informed decisions.
"Selective discounting, loyalty and rewards programmes may hinder effective competition if they:reduce transparency, making it more difficult for consumers to compare offerings; reduce the incentive for consumers to shop around because they already consider they are getting a good deal; increase consumers' search and switching costs, by bundling or tying different products together; or discriminate against consumers who do not belong to these programmes.
The second paper explains the commission's proposed approach to assessing profitability in the retail fuel sector. "Profitability tends to vary over time. High levels of profitability over short periods of time do not necessarily indicate a problem with competition.
"In a market economy prices and profits provide the signals that direct resources to their most valuable use. Of more concern from a competition perspective would be indications that levels of profitability have significantly and persistently exceeded a normal rate of return. Estimates of the cost of capital provide an estimate of a normal rate of return
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