Retail competition in UK Electricity: Differentiating the product through non linear pricing

1
Retail competition in UK Electricity
Differentiating the product through non linear
pricing

• Stephen Davies, Catherine Waddams Price and
  Laurence Mathieu
• ESRC Centre for Competition Policy
• University of East Anglia

2
For a homogeneous good, one objective of
competition is to lower price

• We observe past average price levels (1998-2004)
  for standard pay, London region
• We predict future from market structure and firm
  behaviour
• Are firms softening competition by targeting
  different parts of the market (differentiating
  through the price structure)?
• ?
• We might care which/whose prices are lowered
• Average prices
• Price variance
• Observing the frontier

3
Retail prices fell, then rose again
So did costs

4
margins also fell and then rose
for both incumbent and best offer
5
Incumbent increased mark up more than entrants
while incumbents retain 50-75 of home market
6

• Average prices
• Price variance
• Observing the frontier

7
For a monopoly with non linear tariffs, average
price varies with consumption
Firm behaviour affects price variance
P
X
X
Var(p) interdecile, intrafirm gt0 variance
arises only from tariff structure
8
For linear tariffs, variance arises from
different firm offers
Var(p) intradecile, interfirm gt0 Variance
measures spread of offers, competitivity
9
In competition, with non linear tariffs, variance
arises both from tariff structures and tariff
levels
Components of variance show how firms compete
10
Can split total variance with respect to deciles
or firms

• Total variance of average prices across deciles
  and firms
• av var of firms prices within deciles var
  between the mean prices for each deciles
• av var within firms (i.e. the av firm var
  across deciles) var between firms (in their
  means across deciles)
• If firms use pricing structures to differentiate
  their offers, intra-decile variance will
  increase if they are not competing vigorously,
  inter firm variance will increase
• Conversely, if firms price competitively and
  move nearer the frontier, intra decile and inter
  firm variance will decrease

11
Variances have increased
Increased inter-F ?firms locating further from
each other on the frontier, reduced competitive
pressure Increased intra-D?more specialised
price structures
12

• Observing the frontier

London drifting from frontier specialisation
less clear
1999 2000 2001 2002 2003 2004
No of Firms 15 14 11 10 8 7
No on frontier 2 2 2 2 3 2
Deciles at which firms on Frontier 1-3 1-3 1-3 1-3 1-3 1-6
Deciles at which firms on Frontier 4-9 4-9 4-9 4-9 4-7 7-9
8-9
No off frontier 13 12 9 8 5 5
no with best decile at no with best decile at no with best decile at
3 2 1 1
4 5 9 7 8 3 1
7 4
8 2
9 6 2 1
Av min from frontier 0.33 0.38 0.33 0.4 0.34 0.45
13
Originally 14 regional monopolies
14
Industry consolidation
Regional incumbents Entrants Total
Feb 99 12 2 14
May 99 Choice of supplier for all
Oct 99 12 3 15
Jun 00 11 4 15
Dec 00 9 4 13
Dec 01 7 4 11
Apr 02 price caps removed
Jun 03 5 3 8
Dec 04 5 2 7