Understanding barriers to entry into the vertically integrated oil industry and applying economic theories of entry into this industry

Abstract

Barriers to entry are one of the critical forces that provide incumbent firms with competitive advantage over new entrants and contribute to an oligopoly market structure. The aim of this research was to determine barriers to entry into the vertically integrated oil industry and identify economic theories of entry into the market and apply them to the South African vertically integrated oil industry. A mixed method design was adopted to conduct this research. A 5-point Likert scale questionnaire with statement of barriers to entry obtained from literature was sent out to middle and senior managers of vertically integrated oil firms and non-refining oil wholesalers. Semi-structured interviews of middle and senior managers in the oil industry; regulatory body and industry associations were conducted to gain insights in the industry challenges and those challenges facing small firms. Emerging themes from interview results were analysed on the backdrop of research propositions. Similarly, quantitative results obtained from the survey were analysed based on the hypotheses and contrasted with qualitative results. The findings indicated that there are significant barriers to entry in the oil industry and affect both vertically integrated (refining and marketing) oil firms and non-refining oil wholesalers. However, non-refining oil wholesalers were impacted more negatively by the barriers to entry due to high capital requirements, lack of access to infrastructure, lack of access to capital and regulatory pricing model (RAS). Results also showed that oil firms put different emphasis of importance to different barriers of entry.