Question

1- Suppose the courts ruled that the oil companies must allow the dealers to buy gas from distributors. What effect do you think such a ruling would have on operational policies of the oil companies?

2- Some direct-serve gasoline stations provide repair services, and others concentrate almost exclusively on self-serve gasoline sales. Which type of station is more likely owned by the central oil company and which type is more likely to be franchised? Explain.

3- Typically the stations served (and owned) by distributors are located in rural areas, whereas the direct-serve stations are located in urban areas. Give two economic reasons to explain why you might expect such a pattern.

Answer 1

1. If the court orders the oil companies to allow dealers to buy gas from distributors, this will impact the operational policies of the oil companies badly. Since there is an intermediary, the distributor between the dealer and the oil company, it will reduce their profit margin as some expense has to be made towards the distributor making the costs go high. Though it will become easier for the oil companies to operate as they will now have less burden regarding the oil distribution since the distributor plays some helping hand to them, they will have to incur costs to set up the whole system of distributors.

Thus, the operational policies of the oil companies will be disturbed in the ways described above.

2. Direct-serve gasoline stations are more likely to be owned by the central oil company and the self-serve gasoline stations to be franchised. This is because, the self-serve stations run on the motto of profit as they have very less to hardly any labor force at the station and they are not responsible for providing any additional service. So though the gas available is cheap, the owner gets all the profit and has very little to expense.

On the other hand, the direct serve stations which provide other services as well as more likely to be owned by the central oil companies as they look after the labor and the safety of the station as well. They work for the benefit of the all and are installed for the purpose to serve the customers and not only gain profit.

3. a) The labor and implementation costs of the station served by the distributors are low in rural areas as they get cheap labor and raw material. Also, since the distributors require huge areas to store the gas for further distribution purpose, the rural areas prove to be better option than the urban areas.

b) The direct serve station provide facilities like repair etc which are demanded more by people living in urban areas rather than those in rural areas and thus it is more feasible to have these kind of stations in the urban areas. It is more profitable to have these in urban areas where the demand is more rather in rural areas.