Resource externalities and the persistence of heterogeneous pricing behavior in an energy commodity market

In competitive product markets, repeated interaction among producers with similar economic characteristics would be expected to result in convergence of their behaviors. If convergence does not occur, it raises fundamental questions related to the sustainability of heterogeneous competitive strategies. This paper examines the prices submitted to the British wholesale electricity market by four coal-fired plants, separately owned, approximately of the same age, size and efficiency, and located in the same transmission network zone. Due to the repetitive nature of the spot market, one would expect convergence in strategies. Yet, we find evidence of persistent price dispersion and heterogeneous strategies. We consider several propositions for these effects including market power, company size, forward commitments, vertical integration and the management of interrelated assets.