The Effect Of Administrative Barriers And Vertical Restraints By Oligopolists On China’s Oil Industry

The oil industry is in the upper section of the industrial chain, directly influencing the supply of raw materials and energy for downstream industries, which has important significance to national economy security, military activities and state security, and is closely related to people’s daily lives. But the government raise the administrative barriers to entry into the market for the competitive independents, weakening the industry competition, and reducing consumers’choices. Oligopolistic manufacturers created by administrative power are born to have strong market power, and impose vertical restraints on rivals, which destroying the fair competition. The Oligopolists seek monopoly and monopoly profits, meanwhile claim for huge fiscal subsidies to cover losses, which damage the social welfare.Same market structure though, foreign oil industry is based on the economic barriers, such as economy of scale, resources and technology barriers. By undergoing tough competition, manufacturers with high efficiency survive to continue and stay in the market to develop into oligopolists. However, the forming process of China’s oil industry ruled out the role of market competition. The oligopolistic market structure of China’s oil industry is not merely caused by administrative monopoly or anti-competition behavior by oligopolists, indeed is the result of both.In order to maximize profits, the oligopolists take advantage of their market power on critical resource to implement vertical restraints and raise rivals’variable costs. Our model suggests that with the rivals’variable costs increasing, profits of the oligopolists increase relevantly, but consumer surplus decrease and may cause damage to the social welfare.Administrative barriers set by the government raise the independents’fixed cost, which increase profits of the oligopolists on the one hand, decrease the consumer surplus and social welfare on the other hand. Although our model suggests that the increase of fixed cost can obtain economies of scale, there will be a rise in price and decline of production, which cause national economic instability. Therefore, when the government set the administrative barriers, they should take the whole industry efficiency, consumer and social welfare into account. Both administrative barriers and vertical restraints by oligopolists lead to inefficiency of China’s oil industry.