Working Paper: CEPR ID: DP2406
Authors: Richard Green
Abstract: Many utility markets are now being opened to competition, and some regulators have expressed the hope that this will make the regulation of consumer prices unnecessary. In this paper, entrants offer (differentiated) 'added value', but consumers incur a switching cost if they buy from one of them. The incumbent's profit-maximising price may be well above the level of its costs. This is likely to be the case in the UK's energy industries, but competition may be able to replace regulation in telecommunications, where marginal costs are lower, demand elasticity higher, and entrants can give more 'added value'.
Keywords: regulation; competition; utilities; switching costs
JEL Codes: L50; L90
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increased competition among utility providers (L97) | lower prices for consumers (D41) |
| High switching costs (L15) | reduced competition (L19) |
| Reduced competition (L49) | higher prices for consumers (D49) |
| Low demand elasticity (D12) | incumbents exploit market position by setting prices above marginal costs (D43) |
| Deregulating prices in energy utilities (L97) | welfare losses for consumers (D11) |
| Competition effectiveness varies between industries (L19) | competition in telecommunications is more effective than in energy utilities (L96) |