Principles Principles Principles Principles of a well of a well - - PowerPoint PPT Presentation

Principles Principles Principles Principles of a well

• f a well
• f a well
• f a well-
• functioning

functioning functioning functioning retail energy retail energy retail energy retail energy market market market market

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Morten Hviid Morten Hviid Morten Hviid Morten Hviid Centre for Competition Policy Centre for Competition Policy Centre for Competition Policy Centre for Competition Policy University of East Anglia University of East Anglia University of East Anglia University of East Anglia

What makes a market well What makes a market well What makes a market well What makes a market well-

• functioning?

functioning? functioning? functioning?

Simple economic answer

price is equal to marginal costs

• [or average costs if natural monopoly and fixed costs are

positive]

Incentives for productive efficiency Incentives for optimal level of innovation We tend to see competition as the main driver for all – so important to have several (potential) competitors Non-economists may also think that a well-functioning market allocate benefits fairly.

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The fundamental challenge: product The fundamental challenge: product The fundamental challenge: product The fundamental challenge: product homogeneity homogeneity homogeneity homogeneity

At the retail level, the primary product, be it gas

• r electricity, is a homogeneous good and it has

to remain so

Under standard assumptions about consumer behaviour, this means that competition will be very intense

• And, if there is any fixed costs which can be avoided

by shutting down the firm, that the predicted market structure is MONOPOLY

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Clash with reality Clash with reality Clash with reality Clash with reality

Not necessarily

Look at UK until recently

• Mergers reduced number of regional incumbents
• Very little successful entry
• “The curious incidence of the dog in the night-

time”

But areas where the fit is less good What is the key product which is being sold?

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Ways out of the paradox Ways out of the paradox Ways out of the paradox Ways out of the paradox

Product differentiation

• Can be achieved with bundling, but significant differentiation would

appear difficult [and costly]

• Think about the advertising spend attempting to argue that petrol

differ across brands

Tacit collision [conscious parallelism]

• Not obvious that this is actually stable if consumers are fully rational

Consumer engagement

• Large set of loyal consumers
• Pay for the fixed costs – but who is paying
• Can also support tacit collusion story

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If some consumers pay extra, then what If some consumers pay extra, then what If some consumers pay extra, then what If some consumers pay extra, then what about distributional effects? about distributional effects? about distributional effects? about distributional effects?

Is it fair?

Depends on the identity of the loyal (inactive) consumers

And what about “big data”?

Technically firms have the information to price discriminate further

• This can be welfare enhancing but is it fair?
• This can increase competition by allowing more profits to

fund fixed costs

• Can reduce entry depending on who owns the data

Policy questions: who owns consumer data?

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Conclusion: types of intervention with Conclusion: types of intervention with Conclusion: types of intervention with Conclusion: types of intervention with heterogeneous consumers heterogeneous consumers heterogeneous consumers heterogeneous consumers

If the “problem” is consumer behaviour how and when can we justify intervention?

Thought experiment: for all consumers, look at their regular expenditure and estimate how much money they leave on the table by not making optimal choices.

• For those who leave no money behind but who is by some

measure not able to buy necessities, they are poor – policy focused at alleviating this

• For those who leave money on the table and are not able to

reach this money, they are vulnerable. What is the appropriate policy intervention?

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