Electricity retailing and price dispersion

In this paper, we identify price development in electricity contracts evaluated from the expectation that prices for homogeneous goods converge according to the “law of one price”. The results indicate a substantial degree of price dispersion and that prices fail to converge. By estimation of the long-run relationships and their dynamics, the study identifies that dispersion in specific electricity products seem to be strengthened as more firms enter the market, while increased consumer switching has the opposite effect. Thus, the findings identify market imperfections in the electricity retail market and the possible sources behind it. The study builds on well-established theoretical models to rationalize price dispersion in homogeneous product markets an uses an empirical approach through a vector error correction model (VECM) to identify the long-run relationships.