Thursday, 25 February 2010

Economics 101: Why the strike action by the petrol stations was doomed to fail.

I know it sounds like hindsight, but I was sure the strike would fail. The reasons can be explained through A-level economics. Petrol stations are facing monopsonistic competition: they are many of them, selling nearly identical products but having some sort of monopoly over a small geographical region. In this sort of competition environment it is impossible to have unified strike action (or to be correct the terminology the action was a lock-out since the petrol stations are employers and not employees).

Imagine you are one of the station owners. You heard about the strike and you see a queue of cars lining up to fill up before the deadline. You make as much as 5,000 euros in a night, a large part of which is profit. You suddenly realise that this what is your short term gain will be someone’s medium-term loss: all these people filling with petrol will not need more petrol for at least two more weeks.

So how do you make a profit over the next two weeks? With all the other stations in strike action you sense that the monopolistic competition has ceased: the monopoly you have over a small geographical region expands to include the whole city, maybe the whole district! The demand for your specific stations will shoot through the roof and the profit you can make is substantial, even if you lower your price to low government price that your co-owners are striking against. So you have a huge incentive to stay open and capitalise on being a true monopoly, if only for as long as the strike action lasts.

Not all station owners think like this, but enough do to leave a couple of dozen stations open. It does not mean that these owners want the lower government price or that they are greedy: maybe they are mired in debt, maybe they have children in college and they see that this short term windfall could tie them over for at least a year. Station owners are not workers who work for a fixed wage; a worker who ignores a strike action stands to gain very little, but a station owner stands to gain all the clientele of the stations that remain closed.

So the first day of the strike 43 station owners stay open: it becomes public knowledge, angering all the other owners who were faithful in the lock-out. They realise that they will miss out on the windfall and that the open stations will profit out of their stations remaining closed. One-by-one the stations re-open, until the leadership realises that they need to suspend the lock-out in order to save face before all the station owners take the unilateral action to open their station.

Ultimately the station owners cannot strike effectively; only the handful mining companies, operating under oligopolistic completion, can enforce such an action.

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