The tide of deregulation and privatization calls for new policy instruments for the Korean oil industry. Though deregulation is introduced to remedy government failures, the heavy reliance on the market mechanism increases the risk of market failures in the non-convex industry exhibiting externality in consumption and production. The incentive-based oil policy is defined as an indirect policy that affects rules of the game played by refiners, gas stations and new entrants. The incentive-based oil policy is a solution for the trade-off between the static efficiency and the dynamic efficiency of the oil market. Using a game-theoretic analysis, we analyze price competition, channel competition and entry competition in the deregulated oil market. In the analysis of infinitely repeated price competition, the exceptional governmental intervention is promoted when equilibria of price competition exhibit the destructive competition or the tacit collusion. In the analysis of channel competition, the policy to balance the bargaining power among channel members is suggested. In the analysis of entry competition, the capacity franchise bidding which uses the storage capacity as a strategic variable is discussed as a solution for preventing the excess entry or the entry deterrence. The simulation model incorporating real demand and cost data of the Korean oil industry is analyzed to evaluate the effects of the deregulation of the oil industry. However, the direct intervention of the government should be continued for the control of an oil contingency and the management of the strategic petroleum reserve after the deregulation.
