Jim Rose: Once oil companies have committed to a delivery schedule, petrol stations must sell their inventory to make room for the delivery truck next week.

OPINION: Petrol prices often go nuts, go below cost in the same way some air tickets go rock-bottom most weeks. No one complains about a $39 airfare to Auckland, but we know that price won't last.

Airlines and petrol retailing are prone to ruinous competition because of uncertain demand, scale economies, products that cannot be stored cheaply, the fixed capacity of each firm and the risk of a large excess capacity relative to demand. Ruinous competition, bouts of ridiculously cheap tickets, is why US airlines lost money in the 1980s, made money in the 1990s and have been a bit of a losing proposition since.

Once an airline is committed to a schedule, its costs are irrelevant. All that matters is filling seats with whatever set of prices and last-minute bargains that maximise revenue.

Petrol retailing has the same cut-throat price dynamic. Once the oil companies have committed to a delivery schedule, petrol stations must sell their inventory to make room for the delivery truck next week just as refiners must make room for the next oil tanker into port.

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In common with airlines, petrol retailers must clear their inventory. They know that competing retailers face the same pressure. The competition becomes ruinous because each wants to get in first so there is a downward price spiral. Rather than wait for another retailer to cut prices, you cut them first to snap up what car petrol tanks are left to fill. Get your retaliation in first.

Despite regular price wars, suspicions linger that petrol prices are uncompetitive. New entry must be easy enough if Gull can set up profitably on both sides of the Tasman.

Is there a petrol cartel? The history of cartels is the history of double-crossing. The best place in a cartel is outside selling as much as you can at just below the cartel's higher price. Remember that maxim every time an allegation of collusion is made. Cartels are about price-fixing, stable prices.

They have enough trouble policing secret price cheating, much less weekly price wars. The 2nd law of economics is there is always someone who will cheat on the agreement.

The cartels enforced by governments before airline deregulation were notorious for non-price competition. Too many flights per route, elaborate in-flight service, gourmet meals and every other form of gold plating they could conjure up to undercut the cartel price and win market share.

Petrol retailing is ripe for unlimited non-price competition. Petrol can be the loss leader to win convenience store customers. My local shops has a 24/7 Z convenience extravaganza and a New World petrol station that shuts mid-evening. They are in different markets, not the same cartel.

CRAIG ABRAHAM Ruinous competition can drive everyone broke, says Jim Rose. Air New Zealand and Qantas are two of many airlines that almost went to the wall in recent times.

Airlines and petrol retailing have high fixed costs but low marginal costs once they have committed to a network schedule or a petrol delivery timetable. They must clear their inventory. That makes price cutting tempting and there are no prizes for tardiness in a price war.

As shown by the recent oil company emails, one of the sellers be it of petrol or of air tickets must lead, halting their discounting. Others might follow. Ruinous competition can drive everyone broke. Air New Zealand and Qantas are two of many airlines that almost went to the wall in recent times.

Before long, another price war breaks out when mutual suspicion or misunderstanding fragments the fragile peace. But here we are; weekly price cutting is taken as evidence of successful collusion.

Jim Rose worked on the Australian Productivity Commission's 1994 public inquiry into petrol pricing. He blogs at Utopiayouarestandinginit.com