CHAPTER ONE: INTRODUCTION
This chapter presents the factors driving oligopolistic practices in the Liquefied Petroleum Gas (LPG)
industry in Bosaso, Puntland State of Somalia. It includes the background information, problem
statement, objectives, purpose, significance of the study, research questions, hypothesis, scope,
limitations, definition of terms, and the organization of the thesis.
1.1 BACKGROUND OF THE STUDY
The liquefied petroleum gas (LPG) industry has become an essential aspect of the global energy
landscape, particularly as countries seek cleaner and more efficient energy sources. LPG, primarily
composed of propane and butane, is utilized in various applications, including cooking, heating, and as a
fuel for vehicles. Its advantages over traditional fuels—such as lower emissions, higher efficiency, and
reduced indoor air pollution—make it an attractive option for both developed and developing nations
(International Energy Agency [IEA], 2021).
Globally, the LPG market has witnessed significant growth, driven by urbanization, rising energy
demands, and a shift towards cleaner fuels in the context of climate change (Global Gas Report, 2022).
The International Energy Agency projects that LPG consumption will continue to increase, particularly in
regions with limited access to natural gas infrastructure (IEA, 2021). This trend is particularly notable in
emerging economies where LPG serves as a transitional fuel in the move towards more sustainable
energy systems.
In Africa, the LPG sector is gaining momentum as governments and organizations recognize its potential
to address energy poverty and environmental challenges. Many African countries rely heavily on
traditional biomass and kerosene for cooking and heating, which pose health risks and contribute to
deforestation and greenhouse gas emissions (World Health Organization [WHO], 2018). The adoption of
LPG can significantly mitigate these issues by providing a cleaner and more efficient alternative.
Several African governments have initiated policies aimed at promoting LPG usage, including subsidies,
investments in infrastructure, and public awareness campaigns (African Development Bank [AfDB],
2019). Despite these efforts, the sector faces challenges such as high initial costs, limited distribution
networks, and regulatory barriers that hinder widespread adoption (International Renewable Energy
Agency [IRENA], 2020). Additionally, there is a pressing need for education and awareness to inform
consumers about the benefits of LPG over traditional fuels.
The demand for LPG in Africa is expected to rise due to factors such as population growth, urbanization,
and increasing disposable incomes (McKinsey Company, 2021). However, understanding the unique
dynamics of the LPG market across different African contexts is crucial for stakeholders looking to
harness this growth potential effectively.
This study aims to explore the current state of the LPG industry in Africa, analyzing market trends,
consumer behavior, regulatory frameworks, and the socio-economic impacts of LPG adoption. By
providing a comprehensive overview of these factors, the research seeks to identify opportunities for
growth within the sector while addressing existing challenges. Ultimately, this study will contribute tthe
discourse on sustainable energy solutions in Africa and inform policymakers and industry players about
the critical role of LPG in achieving energy access and sustainability goals across the continent.
Local Perspective (Bosaso, Somalia): Bosaso, as a major commercial hub, plays a pivotal role in Somalia’s
energy sector. LPG has become increasingly significant due to its efficiency and utility. However, the
market in Bosaso is dominated by a few firms, which results in concerns about pricing power, barriers
tentry, and consumer impact. These dynamics highlight the need for a thorough analysis to address
these challenges.
1.2 PROBLEM STATEMENT
The LPG market in Bosaso is dominated by six major companies, namely Somgas, Sahal Gas, Mumtas
Gas, Hass Gas, and others. These companies have created an oligopolistic structure by coordinating their
practices, resulting in limited competition and restricted market access. They have established
agreements to fix prices, limit supply, and divide market territories among themselves. Furthermore,
they impose penalties on any member who breaches the agreement, such as offering lower prices or
entering a market segment outside the agreed boundaries.
This collusion leads to several critical issues:High LPG Prices: The companies take advantage of their
coordinated practices to maintain artificially high prices, which are not reflective of competitive market
dynamics. Barriers to Market Entry: New companies face significant challenges entering the market due
to the established dominance of these firms.Negative Impact on Consumers: Consumers suffer from
limited choice and high prices, leading to a decline in overall welfare.Economic Inefficiency: The lack of
competition reduces the potential for market-driven efficiency, which affects the economic growth and
stability of Bosaso.
While LPG is crucial to Bosaso’s economy, there is limited research on these oligopolistic practices and
their implications. This study aims to investigate the root causes of these market dynamics and their
impact on economic growth and consumer well-being, with the goal of finding solutions to promote fair
competition and sustainable market practices.
1.3 OBJECTIVES OF THE STUDY
The study has the following objectives:
1. To analyze the factors contributing to the oligopolistic structure of Bosaso’s LPG industry.
2. To evaluate the impact of market entry barriers on competition within the LPG industry.
3. To investigate the pricing strategies used by LPG firms and their influence on market prices.
4. To explore the effects of vertical integration on market control among LPG firms.
1.4 RESEARCH QUESTIONS
1. What are the main factors that contribute to the oligopolistic structure of Bosaso’s LPG industry?
2. How do market entry barriers influence competition within the LPG industry?
3. What pricing strategies do LPG firms in Bosaso use, and how do these strategies affect market prices?
4. In what ways does vertical integration influence market control among LPG firms?
1.5 SIGNIFICANCE OF THE STUDY
Academic Contribution: This research contributes to the existing literature on oligopolistic practices in
emerging markets, particularly within the LPG industry. It will provide new insights into market
behaviors and regulatory impacts.
Practical Implications: The findings will guide policymakers and industry stakeholders in formulating
effective regulations to promote fair competition. It will also help businesses understand competitive
practices.
Social Implications: The study has the potential to improve consumer welfare by advocating for
affordable LPG prices, increased market transparency, and enhanced access to energy resources.
1.6 SCOPE OF THE STUDY
Geographical Scope: The study focuses on Bosaso, a major commercial hub in Somalia.
Industry Scope: It examines the LPG industry, focusing on market structure, pricing strategies, entry
barriers, and regulatory frameworks.
Time Frame: The research covers market trends and practices over a specified period (to be detailed in
the methodology).
1.7 DEFINITION OF TERMS
Oligopoly: A market structure in which a few large firms dominate and influence the market significantly,
often leading to limited competition.
Vertical Integration: The process by which a company controls multiple stages of production or
distribution within the same industry.
Price Leadership: A strategy where one leading company sets the price for a product, and other firms in
the industry follow suit.
