Journal of Product & Brand Management

Pricing peculiarities of the UK petrol market

Marcel Cohen
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Marcel Cohen, (1999),"Pricing peculiarities of the UK petrol market", Journal of Product & Brand Management, Vol. 8 Iss 2 pp.
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 Pricing peculiarities of the UK
petrol market
Marcel Cohen
Lecturer in Marketing Strategy, Management School, Imperial
College of Science, Technology and Medicine, University of London,
London, UK

Keywords Competitive strategy, Leverage, Petrol, Pricing, Pricing strategy

Abstract The UK petrol market has experienced, over the last two decades, intense price
competition and as such provides a rich source of information on some of the real-world
issues in pricing. Examines the practical mechanisms that have been used in managing
price competition and also some of the peculiarities of this market. The petrol retailing
market is found to adhere broadly to classical theory of price competition but its special
characteristics cause interesting deviations. Of particular note, a ``leverage effect''
operates whereby price changes affect margins much more than volumes, which leads to
behaviour by oil competitors which seems counter-intuitive. In addition, real-world issues
such as the price adjustment process and the local nature of competition present
practical difficulties which can have a material impact on the profitability that a textbook
exposition of pricing might lead us to expect.
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Introduction
Although the petrol market exhibits many of the textbook principles of price
competition, it does possess some specific characteristics and mechanisms
which cause it to behave in a distinctive manner. In this article, we expose
some of these major points of difference and consider the consequences that
arise from them.
While petrol has been the subject of a number of articles, these papers have
been preoccupied with non-price initiatives such as Ang and Tan (1990),
Treadgold and Lennox (1994) and Cohen (1998a). Pricing in the petrol
market has received less attention. We could only find Slade (1989, 1992),
who uses gasoline prices in the USA to uncover underlying strategies during
price wars. We differ from Slade (1989, 1992) in that while we look at the
strategies adopted by oil companies our focus is on the underlying
infrastructure and mechanisms of the market. We suggest that it is these
characteristics that are important and that cause interesting deviations from a
classical exposition of the subject.
e set the scene by considering the attitude of motorists to petrol and in
particular to the price of petrol. We then explore the distinctive features of
this market the price adjustment processes (both upward and downward),
the local nature of competition, and finally the presence of a leverage effect.

Motorists' attitudes to petrol and its price

It is well-known (see Popcorn, 1991) that consumers have become
increasingly sophisticated when making buying decisions and this applies
equally to the purchase of petrol. No longer can motorists be persuaded that
one brand of petrol may be better than another brand to them ``petrol is
petrol is petrol''. The presence of official national and international standards
that guarantee minimum quality specifications gives motorists the assurance
they need. Additionally, the behaviour of oil companies, whether through
exchange agreements where competitors supply each other's sites to lower
distribution costs or their very involvement in price competition, is a
blatant admission by them that petrol is a commodity with little or no
differentiation. This lack of differentiation is of course the main reason why

JOURNAL OF PRODUCT & BRAND MANAGEMENT, VOL. 8 NO. 2 1999, pp. 153-162, # MCB UNIVERSITY PRESS, 1061-0421 153
 price is so important to petrol purchasers they have little else on which to
base their purchasing decisions. In keeping with this motivation, the price of
petrol was originally freely (but now subject to regulations) posted outside
petrol stations on pole signs which in itself further sensitises petrol
purchasers to the importance of price.
Seeking cheapest petrol A curious phenomenon about petrol purchasers is that they sometimes go
considerably out of their way to hunt for the cheapest petrol, sometimes
forfeiting much of the benefit that a cheaper price might provide by the
petrol consumption in seeking it. Few industries exhibit so much obsession
among consumers about prices. The dispersion of prices the spread of
prices among alternative brands is not very large with a measure of less
than 1 per cent (Cohen, 1998b), so that even if a motorist persistently bought
the most expensive, the impact on his/her annual petrol bill would be
insignificant when compared to other car-related purchases such as servicing
and repairs. Why then are consumers so intent on finding a petrol price
bargain? We suggest that the very nature of petrol as a necessary purchase,
vital to everyday life, causes a certain degree of resentment and a feeling of
obligation and restriction of freedom among petrol purchasers. Too often in
the past, oil companies have exploited this characteristic, specifically when
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there have been petrol shortages, and more generally showing a lack of
appreciation for the motorist's custom. It is this attitude that causes petrol
purchasers to retaliate when the opportunity presents itself by behaving
(almost) irrationally when purchasing petrol. Consumers see ``price hunting''
as an opportunity to hit back at oil companies.

Measuring customer sensitivity to price

The customer sensitivity to price moves is of course technically measured
through the price elasticity of demand. From the above, we expect the market
elasticity of petrol to be low since it is a necessity and the demand for
petrol therefore fluctuates only a little with a movement in price and in
contrast cross (or brand)-elasticity to be extremely high since petrol
purchasers price hunt almost to irrational levels.
Market elasticity The petrol market elasticity is relatively straightforward to calculate using
information available to UK PIA, the Petroleum Industry Association, and
indeed the market elasticity is fairly low at less than one. However, cross-
elasticities are much more difficult to estimate in practice as individual
competitor prices have to be monitored at weekly intervals and indeed
sometimes at hourly intervals. Essentially there are three approaches to
obtaining cross-elasticity information:
(1) pilot studies,
(2) analysis of historical data, and
(3) market research.
The use of pilot studies whereby experimental prices are imposed on a test
market is the least used method by oil companies, partly because of the
necessary delay in obtaining results and partly because such experimental
prices could not be contained within the test area and could potentially
spread and lead to a change in the national price level. The other two
methods of measuring cross-elasticity have been used more commonly.
The petrol price wars of the early 1980s essentially proved to be a large scale
``laboratory experiment'' providing a wide variety of competitor price
combinations for historical analysis. When collecting this information, oil

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Market research
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Unit gross margins are
critical
JOURNAL OF PRODUCT & BRAND MANAGEMENT, VOL. 8 NO. 2 1999
companies used a significant amount of their sales representatives' time to
record competitor price data at the site (petrol station) level and, commonly,
at weekly intervals. For each oil company sales representative, this task
usually occupied the best part of one day per week usually the Monday of
each week and was clearly at significant expense. The fact that competitor
data were commonly collected on a Monday meant that there was scope for
certain competitors to distort competitor intelligence by pricing at a different
level on a Monday than the rest of the week. Other competitors used the
independent retailers that operate their sites to record competitor (usually
three marker sites) prices, but these operators had a vested interest in under-
reporting competitor prices, showing them to be lower than they actually
were, and, therefore, their reports could not be trusted.
The use of market research has been widely used as an alternative to the
above, especially among competitors without the infrastructure to collect and
analyse historical data. Typically, a panel of motorists was asked to record in
a diary all petrol purchases including brands, prices, etc. This information
could then be used to compute the necessary pricing parameters.
More recently, data captured by payment card companies (consumer cards
and fleet cards) are sometimes bought by oil companies for the purpose of
estimating fundamental parameters such as elasticity.
Such analyses show that the cross-price elasticity of demand for a typical
major brand is ten implying that a 10 per cent change in volume could
result from a 1 per cent movement in price relative to competitors. This
figure is clearly extremely high when compared to other industries and
reflects the consumer attitudes towards petrol that were described earlier.
This cross-price elasticity varies quite markedly from one brand to another
for example, we estimate the cross-price elasticity for a minor petrol brand
such as Jet is of the order of 30, reflecting their extremely heavy dependence
on price. The cross-elasticity can also vary quite markedly between
individual petrol stations of the same brand. In general, the better quality
(recently developed or prime location) stations show a low cross-elasticity
while poorer quality stations (poor facilities and poor location) show a very
high elasticity, even if they carry the same premium brand. Finally, some
geographical differences are also evident. In some regions of the country,
some northern localities in particular portray higher cross-elasticities than
some southern parts. Indeed, there are even variations between different
trading areas within the same locality.
Price adjustment
Oil company profits depend on selling high volumes of petrol at low unit
profit margins (see Monopolies and Mergers Commission) rather than high
unit margins on low volumes. Unit gross margins, therefore, are critical to
profitability. They are measured against a cost of product, which is based on
the spot price for petrol on the Rotterdam market. While only a small volume
of petrol is actually bought or sold through Rotterdam, many deals are struck
on the basis of this market price and most integrated UK oil companies use it
as the basis of the transfer price between their refining operation and their
marketing operation. The important feature to note is that the Rotterdam
price is extremely volatile because it is sensitive to world balances in supply
and demand, which themselves are sensitive to political as well as economic
factors. In addition, the cost of product which mirrors it has to be measured
in pounds for UK oil companies and since the Rotterdam market is quoted in
US dollars then a further source of volatility arises from the sterling/dollar
155
 exchange rate. The implication of this volatility is that unit gross margins can
vary significantly from one day to the next and, therefore, even if other
market forces were to remain unchanged there would be a need for price
adjustments.
Price adjustments Price adjustments may be in an upward or downward direction. The oil
company leading an upward price movement must have certain attributes.
The problem is that petrol attracts a lot of media (and indeed government)
attention and therefore leading prices up attracts publicity that no oil
company would wish to receive. The other important feature about
increasing prices is that it is imperative that others follow that is for the
price increase ``to stick'' at least for some short time. No oil company could
withstand being ``out of line'' on price for long. Only certain competitors
have the necessary status within the industry for others to follow. The
upward price move is in effect on behalf of the entire industry since they
are all likely to be suffering from close to zero margins and therefore
leading prices up has associated with it an element of market leadership. The
role of market leader is contested by the five largest oil companies:
(1) Shell,
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(2) Esso,
(3) BP,
(4) Texaco, and
(5) Mobil (even prior to its merger with BP).
Anyone outside these ``big five'' is unlikely to be followed when it increases
price. Even from among the big five leading a price increase is always a
gamble that may lead to humiliation if others do not follow. This is in fact
what happened to BP in the 1980s when it announced a price increase but
none of the big five followed. It was in effect denied the position of leader
and was forced to humbly cancel its price increase plans. So there is a natural
reluctance about leading prices up and sometimes some delays may occur,
with the consequent sacrifice of profits. Eventually, sheer necessity forces
competitors to overcome any reluctance in increasing prices to the point that
on occasions they have been accused of responding rapidly to cost of product
increases but only slowly to decreases (as described below).
Erosion of prices Because the motorist cross-price sensitivity is high, most oil companies have
an incentive to undercut others, which leads to a gradual erosion of prices.
Rarely, if ever, is a price decrease announced in the way price increases are
announced. The downward adjustment of prices is usually achieved by
gradual price erosion. This price erosion can take some time, and when unit
profit margins have been large, oil companies have been accused of
``dragging their heels'' during the downward adjustment of prices in contrast
to rapid responses during upward adjustment of prices. While this
mechanism, making profits during the transition from one equilibrium state
to the next, is an ingenious one, no evidence was found to support this
accusation as reported by Bacon (1986) and more recently by Manning
(1991).
In contrast to price increases, which can only be led by a few, price erosion
can be instigated by any one of the competitors or even by a single petrol
station. The speed of response in a locality depends on the number and
identity of competitors concerned and the price sensitivity of the local
market. It follows that each local trading area has a characteristic rate of

156 JOURNAL OF PRODUCT & BRAND MANAGEMENT, VOL. 8 NO. 2 1999


Customer responsiveness
to competitor price moves
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Pricing policy
JOURNAL OF PRODUCT & BRAND MANAGEMENT, VOL. 8 NO. 2 1999
competitor response to price movements. In some trading areas (such as
certain parts of Leeds), the speed of competitor response is very fast, while in
others (such as the remote areas of Scotland) the speed of competitor
response is very slow. Ultimately, price erosion will spread not just within a
trading area/locality but from one trading area/locality to the next. The
important point to note, however, is that the incidence and speed of price
erosion is out of the control of any one oil company and can cause severe
difficulties that ultimately are reflected in the form of reduced profits.
The local nature of competition
It is clear from the above that customer sensitivity to price as reflected by the
cross-price elasticity of demand varies from one locality to the next. This
variability is attributable not solely to the difference between the consumers
frequenting one locality from the next, but also to the nature of each locality
in terms of access to petrol stations and the facilities they offer.
It is not only customer sensitivity to price that differs from one locality to
another but also competitor responsiveness to other competitor price moves.
Thus, each trading area has a particular (often unique) competitor response
rate as well as a particular consumer response rate associated with it. In
Figure 1, we show the four extreme combinations of the consumer and
competitor response to price movements and the generic pricing policy
associated with each.
It is clear that when customer response to price is high that is customers are
price sensitive with all else equal a company should adopt a price cutting
policy. If competitors hardly respond then it will achieve high volumes that
is volume maximisation (see top-right quadrant). If, however, competitors'
response is high too, then its competitors will also seek to cut their prices and
a ``price war'' is likely to result (see bottom-right quadrant). When customer
response to price movement is low that is customers are not price sensitive
then margin maximisation (see top-left quadrant) is desirable since putting
prices up will not deter many customers but will improve margins. This is so
if competitors do not respond although this is unlikely since competitors
have little to gain by being cheaper when customers are price insensitive. If,
however, competitors follow suit by upping prices too then essentially we
have ``competitor (price) matching'' (see bottom-left quadrant).
These combinations describe only the extreme cases to arrive at generic
outcomes. In practice each trading area is likely to have a specific (possibly
unique) combination requiring a pricing policy that is tailored to those
conditions. How this unique pricing policy is achieved in practice causes
many difficulties. At the local level, noise (due to randomness) in
information masks the underlying mechanisms of competition and makes
the estimation of parameters extremely difficult. Apart from this difficulty,
since the number of local trading areas in the UK will be of the order of
Customer Response
Low High
Competitor Margin Volume
Low Maximisation Maximisation
Response Competitor Price War
High Matching
Figure 1. Generic pricing policies
157
 1,000-3,000, tremendous practical difficulties arise in establishing optimum
policies and also implementing them. Therefore, the need to price at the local
level then introduces an element of imperfection in the quality of pricing
decisions being made, which will of course be reflected in reduced profits.
The local nature of pricing in the petrol market is clearly evident that is
why petrol prices vary so much across the country. The success or failure of
an oil company strategy is then the cumulation of its success or failure across
the various local markets.

Leverage
Price undercutting In the early 1980s, oil companies were on a course of head-on collision
because each competitor was trying to undercut the price of others. To be the
cheapest became almost an obsession as if it were a sign of ``virility'' rather
than an admission of marketing failure. As reported in the national press of
the day, the climax of this activity was the well publicised event when a Jet
petrol station and a nearby Shell petrol station vowed to undercut each other,
which resulted in petrol being sold well below cost. The (one mile) queue of
consumers wishing to take advantage of the prices on offer caused traffic
congestion, which had to be controlled by the police. While this example is
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extreme, it does show the thrust of the oil company strategies of the time and
allows us to speculate that retailing divisions of oil companies managed to
accumulate sizeable losses. Clearly an alternative pricing strategy had to be
developed.
Trade-off between volume In early 1983, the majors of the market, led by Shell, appeared to ignore the
and margin taunts of the ``price-cutters'' of the time and maintained their price levels at
the expense of reduced market shares. This approach is in fact no more than
the classical trade-off between volume and margin. What the majors were
effectively doing was to trade-off some of their market share (i.e. volume) in
return for higher margins on the market share that they did manage to retain.
Since the majors tended to have a much larger number of petrol stations than
the minors, purely geographical strength ensured that they did manage to
retain some significant market share. An important determinant of their
success was the fact that they have a very low profit volume (PV) ratio. Put
another way, their unit gross profit margins are a tiny proportion of their
selling price mainly because of the large duty component in petrol prices.
This meant that a ``leverage effect'' came into play as discussed by Monroe
(1990) whereby any increase in relative price causes a disproportionate
increase to their unit gross profit margins. For example, assuming that the
unit gross margin is of the order of 5 per cent of the selling price, then an
increase in relative price of 1 per cent causes an increase in unit gross profit
margin of 20 per cent. So the classical volume-margin trade-off is not evenly
weighted the volume loss is governed by the 1 per cent price increase but
the margin gain is governed by the 20 per cent unit gross profit margin
increase. Put another way, a 1 per cent increase in price enhances
profitability for volume losses of up to 16.7 per cent, at which point
profitability returns to levels prior to the contemplated increase in price. In
contrast, a 1 per cent decrease in price requires at least a 25 per cent increase
in volume to offset the lower profit margin. These break-even volume
changes to maintain profitability in fact imply price elasticities of 16.7 and
25 and it is interesting to compare these values with the price elasticities
stated earlier of 10 for the major oil companies such as Shell and Esso
and around 30 for the ``price-cutters'' such as Jet and Elf. Indeed, this
comparison explains why the ``price-cutters'' live up to their name.

158 JOURNAL OF PRODUCT & BRAND MANAGEMENT, VOL. 8 NO. 2 1999


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Leverage effect
Asset appreciation
JOURNAL OF PRODUCT & BRAND MANAGEMENT, VOL. 8 NO. 2 1999
The leverage effect discussed above can be demonstrated more precisely
when expressed in algebraic terms. In the Appendix we consider a typical
competitor and make some simple assumptions. By formulating an
expression for the total gross profit as a function of price and differentiating
it we can identify the price conditions that maximise profit. This price
condition is expressed in terms of ``price position'', that is the price
described by the extent it is above the average market price, P.
1 m
Optimum price position 
L P
where L is the cross-elasticity of demand to price
m is the unit gross profit margin
From this expression it is clear that a premium over the average market price
can be commanded depending on the value of 1/L. The value 1/L is in fact
conceptually equivalent to the differential advantage that the competitor
possesses relative to other competitors. It follows that the greater the
differential advantage that is possessed then the greater the price premium
that can be received. This conclusion is of little surprise. However, what is of
interest is the second (correction) term expressed as m/P. This points to the
importance of the PV ratio referred to earlier. For a constant differential
advantage, as the margin proportion is reduced, so the price premium that
can be received is increased.
The leverage effect just described serves to explain why petrol companies
find it beneficial to increase prices despite the fact that they suffer from high
cross-elasticities of demand to price. It also helps clarify what is likely to
happen if the control of the price of petrol is removed from the oil companies
and put in the hands of the independent dealers operating petrol stations as
was proposed in 1990 by the Petrol Retailers Association. They claimed that
oil companies were holding prices artificially high. They then also claimed
that petrol prices would be lower if the dealers operating the petrol stations
were left in control of prices. The validity of this claim depends on whether
the dealers' margin per litre of petrol is greater or less than that of the oil
companies. We are led to believe that the dealers' margins are smaller than
that of the oil companies and therefore, by the leverage effect argument that
we have just presented, dealers will have the incentive to increase prices to
levels that are (even) higher than that set by oil companies. There is,
however, an additional complication which stems from the way petrol station
shop profits are shared between oil companies and dealers. If the dealers
enjoy a greater share of shop profits than oil companies then that is
equivalent to their enjoying larger petrol margins and that may give them an
incentive to set petrol prices that are lower than those set by oil companies.
This point helps to explain why the sharing of shop profits has received so
much attention (Dwek, 1992).
The arguments so far assume that profit maximisation is the objective for all
competitors in the market. However, this assumption is plainly not true.
Certain competitors make profits not solely from their trade in petrol but also
from asset appreciation realised when selling portfolios of petrol stations to
oil companies as in the case of Heron, the independent large chain
(Temple, 1989). This objective means that they might be prepared to
sacrifice short-term petrol profits in order to boost volumes and so enjoy an
appreciation of the capital price of their petrol stations. Others, such as the
grocery hypermarket, are suspected of selling petrol at zero or almost zero
profits in order to attract non-petrol customers to their stores in effect,
159

Hypermarkets and the
petrol market
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Counter-intuitive behaviour
160
using petrol as a loss leader. Yet other competitors are quite content to make
a loss in their retail operation provided that they can maintain a presence in
the market so as to qualify for North Sea exploration concessions.
In January 1995, Esso launched its campaign known as ``Price Watch'',
which is widely claimed to be in retaliation to the advance of the grocery
hypermarkets into the petrol market although this is sometimes denied by
Esso (Holloway, 1995). These hypermarkets entered the market
progressively one store at a time over some ten years and by 1995
accounted for more than 25 per cent of the market (The Economist, 1996).
The question that arises is why did Esso wait some ten years before
responding to the hypermarket entry? We suggest that this strategy can be
explained, at least in part, by the leverage effect that we discussed earlier. In
the early days of the hypermarket entry into the petrol market, Esso had
essentially two options. One option was to show restraint and accept losses in
volume in the parts of the country affected by the presence of hypermarkets.
The other option was to retaliate by matching (or undercutting) hypermarket
prices, which inevitably would mean the spread of lower prices to all areas of
the country, even those unaffected by the presence of hypermarkets. Which
option to choose depended on which option would lead to the least damage
to Esso's profits. Ignoring second order effects, this decision simply boils
down to whether margin changes are more important to profits in this market
than volume changes. In most markets volume is extremely important to
profitability, which is why it is common for incumbent firms to cut prices
when faced with the prospect of new entrants into their market. For the
hypermarket entry into the petrol market there were two important
differences. First, because petrol has a small PV ratio, the leverage effect
discussed earlier favours the protection of profit margins at the expense of
losses in volume. Second, the volumes lost by oil companies due to the
hypermarket entry initially were relatively small. It was only in the mid-
1990s that the volumes at stake became significant. We therefore claim that
the natural response of an incumbent firm to the threat of new entrants might
be to cut prices. In the case of petrol, because of specific peculiarities, the
leverage effect and the slow entry of hypermarkets, a period of restraint was
in fact in the interest of major oil companies such as Esso. However, while
this period of restraint was rational in the short term in the quest for profits, it
did give the hypermarkets an opportunity to gain a foothold in the market,
with disastrous long-term consequences.
We claim that the leverage effect helps to explain some of the counter-
intuitive behaviour in the petrol market such as why petrol companies find
it beneficial to increase prices despite customers being highly sensitive to
price and also why Esso's price cutting response to the entry of hypermarkets
was delayed by some ten years. While the leverage effect is important in
many markets, its effects are most felt when price movements that are
contemplated are significant when compared to the PV ratio and hence it is
particularly important to the petrol market, which is characterised by a PV
ratio which is extremely low. The characteristic of a low PV ratio itself stems
from the heavy burden of duty that each litre of petrol has to carry. It is
interesting to consider what would happen if the level of duty was lower, as
it is the USA, or if duty was not collected through the price of petrol but
instead through other means such as road tax or a tax on tyres but this is
left as a matter for further research.
JOURNAL OF PRODUCT & BRAND MANAGEMENT, VOL. 8 NO. 2 1999

Price sensitive
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Impact on profitability
JOURNAL OF PRODUCT & BRAND MANAGEMENT, VOL. 8 NO. 2 1999
Summary and conclusions
For reasons that we have discussed, the petrol retailing market is clearly very
price sensitive and has experienced intensive price competition for at least
two decades, making it a very rich source of information on real-world issues
regarding price competition. For this market, price adjustment is an
important aspect of price competition because the cost of product, which is
based on the Rotterdam market and sterling/dollar exchange rates, can
fluctuate significantly on a daily basis. We have found that the process of
price adjustment can in itself affect the process of competition and therefore
the profit outcome. We saw that because of political, media and leadership
implications associated with the upward adjustment of prices there is a
natural reluctance to increase prices when necessary. Downward adjustment
follows an entirely different process price erosion which is outside the
control of any one oil company and is dependent on the identity and
concentration of competitors. The speed of adjustment is therefore affected,
which in turn can have repercussions on profitability. We saw too that price
competition takes place at the local trading area level. Each local trading
area has its own customer response and competitor response characteristics.
The variety of combinations of customer and competitor responses at the
local trading level has led us to define some generic pricing policies margin
maximisation, volume maximisation, competitor matching and price wars.
The chosen policy for a trading area will depend on its specific
characteristics and the overall success or failure of an oil company is simply
the cumulative effect of its success or failure over all the local trading areas
in which it competes.
The fact that profit margins account for only a tiny proportion of the price of
petrol makes the leverage effect extremely important in the petrol market and
sometimes leads to action which appears counter-intuitive. In particular, we
suggest that the leverage effect permits oil companies to increase prices,
despite motorists being very price sensitive, and also we attribute the (ten-
year) delay in Esso's price cutting response to the entry of hypermarkets to
be partly due to the leverage effect.
The petrol retailing market then broadly adheres to classical theory of price
competition but it does have some special characteristics which cause
interesting deviations. In addition, real-world issues such as the price
adjustment process and the local nature of competition present practical
difficulties which can have a material impact on profitability.
The peculiarities of the petrol market may well be present, although in a
lesser form, in other markets. It would be interesting to find out and to
consider the implications. This, however, must be the subject of further
research.
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Appendix
Consider a competitor whose volume V varies linearly with its price P according to the
following equation
PP 
V Vo L  Vo where
P
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V0 is the volume when at the market average price

 is the market average price

P

L is the cross-elasticity of demand to price

The total profit p is simply unit margin m 6 volume V. Differentiating p with respect to P,
we get
d dV dm mLVo PP 
m V  Vo L  Vo
dP dP dP P P

assuming m = P Constant cost, C.

d
At maximum p, dP = 0, so that the optimum price position, that is the price described by the
extent it is above the average market price, P, is given by:
PP  1 m
Optimum   :
P L P

&

162 JOURNAL OF PRODUCT & BRAND MANAGEMENT, VOL. 8 NO. 2 1999

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