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Excess capacity in gasoline retailing. McFadyen, Stuart Malcolm

Abstract

The purpose of this study was to analyse the competitive pressures producing excess capacity in gasoline retailing and to attempt to estimate the excess capacity existing in this industry in British Columbia. Before either of these tasks could be undertaken it was necessary to decide exactly what is meant by the term "excess capacity." A study of the relevant literature led to the choice of the following definition: Excess capacity = (number of outlets existing in an industry under present competitive conditions) - (number of outlets which could be expected in the industry under conditions of active price competition). This definition of the optimum number of firms in an industry makes it possible to measure the excess amount of resources in an industry over the most efficient amount. The key to the definition is the presence of active price competition in the market under consideration. If this condition is met a number of outlets satisfying the Chamberlinian "sort of ideal" will be present in the industry when long run equilibrium is achieved. To determine whether active price competition was present in a given market, evidence (gathered by means of an interview survey) was considered on the following points: (i) The prevalence of consignment selling, (ii) The degree of uniformity of the retail price of gasoline in a given sub-market, (iii) The height of dealer margins. Supplementary evidence bearing directly on the extent of excess capacity was gathered on: (i) Rent subsidization, (ii) Direct observation of excess capacity and, (iii) Estimates by service station operators of the degree of underutilization. Sixteen operators were interviewed in two urban sub-markets and on the basis of a detailed evaluation of the above evidence six service stations were estimated to constitute excess capacity. The oligopolistic interdependence of the major oil companies which dominate gasoline retailing in urban areas prevented an extension of this proportion to all urban stations. In non-metropolitan areas of the province 39 out of 110 stations were estimated to be excess capacity. Because the influence of the major oil companies is much less in these areas this proportion can be extended to show approximately 740 stations to be excess capacity out of the 2107 stations in these areas.

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