ExxonMobil: Achieving Big Profits During Hard Times
Synopsis
This case provides an illustration of pricing issues in a commodity market. Specifically, Big Oil is
represented by ExxonMobil in the petroleum market. An anecdote is given as a means of illustrating the
drastic change in gasoline prices between 1998 and 2006. In that eight-year time period, prices more
than tripled. Many are quick to point the finger of blame at greedy corporations that are gouging,
manipulating, or at the very least, taking advantage of the consumer.
This case provides extensive information on the factors that affect the prices in a commodity market;
principally, supply and demand. Thus, if supply is short and/or demand is high, prices will go up.
Because the cost of doing business for big oil companies basically remains the same, companies like
ExxonMobil make their biggest profits at a time when the consumer is being hit the hardest.
The case also provides information on the effect of futures trading markets on price. Based on
speculation about the impending nature of supply and demand and any factor that might affect either
one, oil and gas futures are constantly being bought and sold. Such trading activities are not only based
on speculation of supply and demand, but also have an effect on the fundamental supply-demand
situation.
Discussion Questions
1. Which, if any, of the pricing strategies discussed in the chapter are being applied by ExxonMobil
and other oil companies? Could they adopt any other strategies?
This question is designed to get students to review and think about each of the pricing strategies
discussed in the text. However, none of the strategies in the chapter are good descriptions of how
ExxonMobil sets its prices. However, a couple of the pricing strategies could be applied if their
definitions are stretched. Captive-product pricing occurs when a company makes a product that
must be used along with a main product, such as razor blades and razors, video games and video
game consoles, and printer cartridges and printers. In the case of gasoline companies, they are
not making the main product (the internal combustion powered vehicle). But nonetheless,
customers are captive because they have no choice but to use gasoline in their cars.
Some form of geographical pricing is also considered, although none of the definitions of such in
the text seem to be appropriate. Point out that gasoline prices vary from state to state and even
from city to city. Zone pricing probably comes the closest to describing pricing of gasoline.
However, it is more than freight costs that affect the price of gas in any given geographical area.
Constraints in refining and distributing, different blends, and sales taxes all contribute to these
differences.
Students should also be directed to consider the general pricing approaches outlined in Chapter
10. Of all of these, the one that best applies to the pricing of gasoline is the competition-based
pricing approach of going-rate pricing. In the case of an oligopolistic industry that sells a
commodity, firms charge roughly the same price. Some firms may charge a bit more or less, but
that difference remains constant.
2. Discuss buyer reactions to changes in the gas prices. How can you explain these reactions?
As companies raise or lower their prices, consumers do not perceive such changes as a signal of
product quality. In other words, consumers do not perceive an increase or decrease in the price
of gasoline as a signal of decreasing or increasing quality levels. In a similar manner, if one
company were to raise its prices above what other companies are charging, they would lose
sales. This is because the demand of gasoline is inelastic in relation to its price.
Normal increases or decreases in gasoline prices that occur gradually generally go unnoticed by
consumers. Gasoline is a necessity, and consumers generally understand that all companies
raise and lower their prices at the same time. Thus, most people do not price shop for gasoline
and in general, do not pay much attention to the price of gas. But rapid and drastic price
fluctuations are those that grab consumers’ attention.
3. How should ExxonMobil react to gasoline price changes by other large and small oil companies?
Can ExxonMobil keep its prices stable (or even lower them) when the market price is
increasing? Should it?
Because ExxonMobil follows a going-rate strategy that is based on the supply-demand governed
market price, this is more of a hypothetical question. This question is also meant to incite
somewhat of an ethical discussion regarding an issue that many students undoubtedly have
thought about. While ExxonMobil is simply setting price according to market, are they bound to
do so? Can’t they lower their prices if they want to?
One point-of-view will say that at times of high prices when ExxonMobil and other companies
are making huge profits, they should give customers a break and lower prices. They can afford
to, after all. The other point-of-view will say that ExxonMobil is not doing anything wrong; it is
simply conducting business. Therefore, it has every right to charge market rates. In fact, as far
as ethics are concerned, some might point out that it is ExxonMobil’s duty to reap high profits
when they can because they have a moral obligation to investors with respect to stock price.
Also, no one feels sorry for the big oil companies when excess supply drives prices down (as was
the case in the late 1990s) and their profits are low. Periods of high gas prices allow oil
companies to make up lost profits from those periods.
One other point that should be brought up here is ExxonMobil’s margin. As the case points out,
the entire oil industry had a profit margin of only 8.5 percent in 2005. So, why did oil companies
make record profits in that year? The simple reason of scale: they sell more volume of their
product than any other industry. Thus, even if ExxonMobil wanted to cut prices artificially and
give customers a break, just how big of a break could they give? If they were to cut their margin
by 2 percent or 3 percent, at $3 a gallon, that would amount to only 6-9 cents per gallon.
4. Consider the public policy issues within and across channel levels of the oil industry. Is
ExxonMobil acting illegally or irresponsibly by reaping record profits while consumers are
hurting at the pumps?
It should be very clear after reading this case that the big oil companies are not violating pricefixing laws. Even after various government investigations, there is no evidence of such. So,
unless one wants to subscribe to an extreme conspiracy theory that the government officials and
agencies conducting such investigations are being paid off, this argument does not hold water.
Additionally, there is the evidence that oil companies sell a commodity, and by definition, all
companies follow going-rate price.
In a similar manner, there is no evidence of the issues of pricing across channel levels such as
price discrimination, retail price maintenance, or deceptive pricing. This, combined with the
answer to question 3, would indicate that ExxonMobil has not acted irresponsibly.
5. How would you “fix” the problem of rising gas prices? Consider solutions for different groups,
including governments, corporations, and consumers. What are the advantages and
disadvantages of your proposed solutions?
Governments: At times of high gas prices, consumers point to politicians for answers and for
relief. Thus, in times of elections cycles, gas price seems to be somewhat of a campaign issue.
Some of the following are options:
 Place artificial limits on the profits that gasoline companies can make. This, however,
would interfere with a free-market economy and have repercussions on other aspects of
the industry as well as the economy. As the answer to question 3 points out, such limits
would likely not help much in the way of reducing the price of a gallon of gas for
individuals.
 Reduce gasoline sales taxes. Given that gasoline sales taxes averaged 40 cents a gallon
in 2005, it would seem that more relief could be given to consumers by reducing such
than by limiting the profits of oil companies. Could federal and state governments cut

that tax in half? It would be a start. But where does that tax money go? Generally
speaking, it pays the bills on roads and government transportation costs. Thus, if this
revenue is lost, either those areas will suffer, or the revenue will have to come from
somewhere else.
Passing legislation that would increase the production and refining capacities of oil and
gas in the United States. It would seem that this is the area where the government could
have the biggest impact. The government would not even have to subsidize such
activities. It would simply have to make it possible for oil companies to build more
refineries, pipelines, and drilling operations. This would not only increase supply and
reduce price, but it would allow the United States to be less dependent on foreign oil. The
downside to this is the effect of such operations on the environment.
Corporations: To help the supply-demand equilibrium, big oil companies could optimize their
efficiency for producing and refining within the constraints set for them. They could also invest
in the development of alternative fuels such as ethanol. And yet, as the production and use of
such an alternative would bring down the demand for petroleum-based fuels and lower the price
of such, it is not clear that the pricing for alternative fuels would make it possible for this shift to
take place (i.e., if ethanol is more expensive and results in lower fuel economy, why would
consumers buy it?).
Consumers: The biggest thing that consumers could do to help gas prices is to buy less. While
that may sound counterintuitive, less consumption means less demand and that means lower
prices in a commodity market. However, consumers in the United States are very slow to make
the kinds of behavioral modifications that have a significant impact on gas consumption.
Carpooling, using public transportation, and simply cutting back on how much driving is done
are all things that most consumers are reluctant to do unless driven to an extreme. Even the act
of switching to more fuel efficient vehicles is something that is relatively slow to occur.
Consumers want cheaper fuel, but do not want to be inconvenienced.