IDEAS home Printed from https://ideas.repec.org/p/cam/camdae/1849.html
   My bibliography  Save this paper

Price discrimination and the modes of failure in deregulated retail electricity markets

Author

Listed:
  • Simshauser, P

Abstract

In Australia, as with Great Britain, governments have shown rising concern with the health of competitive residential electricity markets. A core concern is the practice of price discrimination and the rising dispersion of prices. The State of Queensland implemented Full Retail Contestability in 2007, but held a regulated price cap in place until 2016, when it finally deregulated its residential electricity market. Almost simultaneously, the two jurisdictions that pioneered retail price deregulation, Great Britain and Victoria, were questioning their prior policy decision. Queensland makes for a fascinating case study because Southeast Queensland comprises a fully deregulated retail market while Regional Queensland is a regulated monopoly – with common input costs across both zones. Consequently, a regulated monopoly with a uniform tariff and 640,000 customers forms a very large control group, which can be directly compared to the competitive market of more than 1.3 million customers – making such analysis globally unique. Analysis of Queensland market conditions concludes the policy is welfare enhancing. To be clear, rising electricity prices are a problem, but price discrimination is not. The deregulated competitive market is, perhaps unsurprisingly, better at regulating the overall average tariff and consumer welfare has been enhanced by $184 million per annum – with some consumer segments very materially better off. However, certain modes of failure remain, viz. an inter-consumer misallocation problem and lack of transparency vis-à-vis the anchoring of discounts – known as the “discounts off what?” problem. Resolving the inter-consumer misallocation problem is relatively straight forward via ensuring energy retailers (voluntarily) move vulnerable customers onto a Benchmark-equivalent or suitably discounted tariff. Due to the non-linearity of tariffs and the rising mix of discrete metered loads, the latter can be best solved by producing a weighted average of Standing Offers, and using this as the benchmark.

Suggested Citation

  • Simshauser, P, 2018. "Price discrimination and the modes of failure in deregulated retail electricity markets," Cambridge Working Papers in Economics 1849, Faculty of Economics, University of Cambridge.
  • Handle: RePEc:cam:camdae:1849
    as

    Download full text from publisher

    File URL: http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1849.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Severin Borenstein & Stephen Holland, 2005. "On the Efficiency of Competitive Electricity Markets with Time-Invariant Retail Prices," RAND Journal of Economics, The RAND Corporation, vol. 36(3), pages 469-493, Autumn.
    2. Ralph Turvey, 1968. "Peak-Load Pricing," Journal of Political Economy, University of Chicago Press, vol. 76, pages 101-101.
    3. Paul Simshauser, 2014. "From First Place to Last: The National Electricity Market's Policy-Induced ‘Energy Market Death Spiral’," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 47(4), pages 540-562, December.
    4. John Freebairn, 2014. "Carbon Price versus Subsidies to Reduce Greenhouse Gas Emissions," Economic Papers, The Economic Society of Australia, vol. 33(3), pages 233-242, September.
    5. Tully, Stephen, 2006. "The Human Right to Access Electricity," The Electricity Journal, Elsevier, vol. 19(3), pages 30-39, April.
    6. Kenneth S. Corts, 1998. "Third-Degree Price Discrimination in Oligopoly: All-Out Competition and Strategic Commitment," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 306-323, Summer.
    7. Schwartz, Marius, 1990. "Third-Degree Price Discrimination and Output: Generalizing a Welfare Result," American Economic Review, American Economic Association, vol. 80(5), pages 1259-1262, December.
    8. Yongmin Chen, 1997. "Paying Customers to Switch," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 877-897, December.
    9. Holmes, Thomas J, 1989. "The Effects of Third-Degree Price Discrimination in Oligopoly," American Economic Review, American Economic Association, vol. 79(1), pages 244-250, March.
    10. Varian, Hal R, 1985. "Price Discrimination and Social Welfare," American Economic Review, American Economic Association, vol. 75(4), pages 870-875, September.
    11. Phillip Wild, William Paul Bell, and John Foster, 2015. "Impact of Carbon Prices on Wholesale Electricity Prices and Carbon Pass-Through Rates in the Australian National Electricity Market," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    12. Felder, Frank A., 2010. "The Practical Equity Implications of Advanced Metering Infrastructure," The Electricity Journal, Elsevier, vol. 23(6), pages 56-64, July.
    13. Taylor, Curtis R, 2003. "Supplier Surfing: Competition and Consumer Behavior in Subscription Markets," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 223-246, Summer.
    14. Peter O. Steiner, 1957. "Peak Loads and Efficient Pricing," The Quarterly Journal of Economics, Oxford University Press, vol. 71(4), pages 585-610.
    15. Greg Shaffer & Z. John Zhang, 2000. "Pay to Switch or Pay to Stay: Preference‐Based Price Discrimination in Markets with Switching Costs," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(3), pages 397-424, June.
    16. Catherine Waddams Price and Minyan Zhu, 2016. "Non-discrimination Clauses: Their Effect on British Retail Energy Prices," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
    17. MacGill, Iain, 2010. "Electricity market design for facilitating the integration of wind energy: Experience and prospects with the Australian National Electricity Market," Energy Policy, Elsevier, vol. 38(7), pages 3180-3191, July.
    18. Nelson, Tim & Orton, Fiona, 2013. "A new approach to congestion pricing in electricity markets: Improving user pays pricing incentives," Energy Economics, Elsevier, vol. 40(C), pages 1-7.
    19. Severin Borenstein, 1985. "Price Discrimination in Free-Entry Markets," RAND Journal of Economics, The RAND Corporation, vol. 16(3), pages 380-397, Autumn.
    20. Stephen Littlechild, 2016. "Contrasting Developments in UK Energy Regulation: Retail Policy and Consumer Engagement," Economic Affairs, Wiley Blackwell, vol. 36(2), pages 118-132, June.
    21. Elegido, Juan M., 2011. "The Ethics of Price Discrimination," Business Ethics Quarterly, Cambridge University Press, vol. 21(4), pages 633-660, October.
    22. Paul Simshauser and David Downer, 2016. "On the Inequity of Flat-rate Electricity Tariffs," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    23. Rosa Branca Esteves, 2009. "Customer Poaching And Advertising," Journal of Industrial Economics, Wiley Blackwell, vol. 57(1), pages 112-146, March.
    24. Bester, Helmut & Petrakis, Emmanuel, 1996. "Coupons and oligopolistic price discrimination," International Journal of Industrial Organization, Elsevier, vol. 14(2), pages 227-242.
    25. Faruqui, Ahmad & Sergici, Sanem & Sharif, Ahmed, 2010. "The impact of informational feedback on energy consumption—A survey of the experimental evidence," Energy, Elsevier, vol. 35(4), pages 1598-1608.
    26. Stephen Littlechild, 2014. "Promoting or restricting competition?: Regulation of the UK retail residential energy market since 2008," Cambridge Working Papers in Economics 1441, Faculty of Economics, University of Cambridge.
    27. Simshauser, Paul & Whish-Wilson, Patrick, 2017. "Price discrimination in Australia's retail electricity markets: An analysis of Victoria & Southeast Queensland," Energy Economics, Elsevier, vol. 62(C), pages 92-103.
    28. Faruqui, Ahmad, 2010. "The Ethics of Dynamic Pricing," The Electricity Journal, Elsevier, vol. 23(6), pages 13-27, July.
    29. Matutes, Carmen & Regibeau, Pierre, 1992. "Compatibility and Bundling of Complementary Goods in a Duopoly," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 37-54, March.
    30. Schmalensee, Richard, 1981. "Output and Welfare Implications of Monopolistic Third-Degree Price Discrimination," American Economic Review, American Economic Association, vol. 71(1), pages 242-247, March.
    31. Thisse, Jacques-Francois & Vives, Xavier, 1988. "On the Strategic Choice of Spatial Price Policy," American Economic Review, American Economic Association, vol. 78(1), pages 122-137, March.
    32. Miguel Flores and Catherine Waddams Price, 2018. "The Role of Attitudes and Marketing in Consumer Behaviours in the British Retail Electricity Market," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4).
    33. Brown, Toby & Faruqui, Ahmad & Grausz, Léa, 2015. "Efficient tariff structures for distribution network services," Economic Analysis and Policy, Elsevier, vol. 48(C), pages 139-149.
    34. Faruqui, Ahmad & Malko, J.Robert, 1983. "The residential demand for electricity by time-of-use: A survey of twelve experiments with peak load pricing," Energy, Elsevier, vol. 8(10), pages 781-795.
    35. Whinston, Michael D, 1990. "Tying, Foreclosure, and Exclusion," American Economic Review, American Economic Association, vol. 80(4), pages 837-859, September.
    36. S. Borenstein, 2013. "Effective and Equitable Adoption of Opt-In Residential Dynamic Electricity Pricing," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 42(2), pages 127-160, March.
    37. Tim Nelson & Paul Simshauser & James Nelson, 2012. "Queensland solar feed-in tariffs and the merit-order effect: economic benefit, or regressive taxation and wealth transfers?," Economic Analysis and Policy, Elsevier, vol. 42(3), pages 277-301, December.
    38. Simshauser, Paul & Nelson, Tim, 2015. "Australia’s coal seam gas boom and the LNG entry result," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 59(4), October.
    39. Paul Simshauser, 2014. "When Does Electricity Price Cap Regulation Become Distortionary?," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 47(3), pages 304-323, September.
    40. Xiaoping He & David Reiner, 2017. "Why Consumers Switch Energy Suppliers: The Role of Individual Attitudes," The Energy Journal, International Association for Energy Economics, vol. 0(Number 6).
    41. Borenstein, Severin & Rose, Nancy L, 1994. "Competition and Price Dispersion in the U.S. Airline Industry," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 653-683, August.
    42. Buckman, Greg & Diesendorf, Mark, 2010. "Design limitations in Australian renewable electricity policies," Energy Policy, Elsevier, vol. 38(7), pages 3365-3376, July.
    43. Morten Hviid & Catherine Waddams Price, 2012. "Non‐Discrimination Clauses in the Retail Energy Sector," Economic Journal, Royal Economic Society, vol. 122(562), pages 236-252, August.
    44. John T. Wenders, 1976. "Peak Load Pricing in the Electric Utility Industry," Bell Journal of Economics, The RAND Corporation, vol. 7(1), pages 232-241, Spring.
    45. James D. Dana Jr., 1998. "Advance-Purchase Discounts and Price Discrimination in Competitive Markets," Journal of Political Economy, University of Chicago Press, vol. 106(2), pages 395-422, April.
    46. John Vickers, 2005. "Abuse of Market Power," Economic Journal, Royal Economic Society, vol. 115(504), pages 244-261, June.
    47. James D. Dana Jr., 1999. "Using Yield Management to Shift Demand When the Peak Time is Unknown," RAND Journal of Economics, The RAND Corporation, vol. 30(3), pages 456-474, Autumn.
    48. Stole, Lars A., 2007. "Price Discrimination and Competition," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 34, pages 2221-2299, Elsevier.
    49. Steve A. Fenrick, Lullit Getachew, Chris Ivanov, and Jeff Smith, 2014. "Demand Impact of a Critical Peak Pricing Program: Opt-in and Opt-out Options, Green Attitudes and Other Customer Characteristics," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    50. Simshauser, Paul, 2016. "Distribution network prices and solar PV: Resolving rate instability and wealth transfers through demand tariffs," Energy Economics, Elsevier, vol. 54(C), pages 108-122.
    51. Michael A. Crew & Paul R. Kleindorfer, 1976. "Peak Load Pricing with a Diverse Technology," Bell Journal of Economics, The RAND Corporation, vol. 7(1), pages 207-231, Spring.
    52. Paul L. Joskow, 1976. "Contributions to the Theory of Marginal Cost Pricing," Bell Journal of Economics, The RAND Corporation, vol. 7(1), pages 197-206, Spring.
    53. Monica Giulietti & Catherine Waddams Price & Michael Waterson, 2005. "Consumer Choice and Competition Policy: a Study of UK Energy Markets," Economic Journal, Royal Economic Society, vol. 115(506), pages 949-968, October.
    54. Ralph A. Winter, 1997. "Colluding on Relative Prices," RAND Journal of Economics, The RAND Corporation, vol. 28(2), pages 359-371, Summer.
    55. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
    56. Ahmad Faruqui & Sanem Sergici, 2010. "Household response to dynamic pricing of electricity: a survey of 15 experiments," Journal of Regulatory Economics, Springer, vol. 38(2), pages 193-225, October.
    57. Paul W. Dobson & Michael Waterson, 2005. "Chain‐Store Pricing Across Local Markets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 14(1), pages 93-119, March.
    58. Katz, Michael L, 1984. "Price Discrimination and Monopolistic Competition," Econometrica, Econometric Society, vol. 52(6), pages 1453-1471, November.
    59. Nelson, Tim & Nelson, James & Ariyaratnam, Jude & Camroux, Simon, 2013. "An analysis of Australia's large scale renewable energy target: Restoring market confidence," Energy Policy, Elsevier, vol. 62(C), pages 386-400.
    60. James D. Dana Jr., 1999. "Equilibrium Price Dispersion Under Demand Uncertainty: The Roles of Costly Capacity and Market Structure," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 632-660, Winter.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Tsao, Yu-Chung & Vu, Thuy-Linh, 2019. "Power supply chain network design problem for smart grid considering differential pricing and buy-back policies," Energy Economics, Elsevier, vol. 81(C), pages 493-502.
    2. Correa-Giraldo, Manuel & Garcia-Rendon, John J. & Perez, Alex, 2021. "Strategic behaviors and transfer of wholesale costs to retail prices in the electricity market: Evidence from Colombia," Energy Economics, Elsevier, vol. 99(C).
    3. Khalilpour, Kaveh R. & Lusis, Peter, 2020. "Network capacity charge for sustainability and energy equity: A model-based analysis," Applied Energy, Elsevier, vol. 266(C).
    4. Simshauser, P., 2020. "Merchant utilities and boundaries of the firm: vertical integration in energy-only markets," Cambridge Working Papers in Economics 2039, Faculty of Economics, University of Cambridge.
    5. Muyi Yang & Yuanying Chi & Kristy Mamaril & Adam Berry & Xunpeng Shi & Liming Zhu, 2020. "Communication-Based Approach for Promoting Energy Consumer Switching: Some Evidence from Ofgem’s Database Trials in the United Kingdom," Energies, MDPI, Open Access Journal, vol. 13(19), pages 1-16, October.
    6. Simshauser, P., 2019. "Lessons from Australia’s National Electricity Market 1998-2018: the strengths and weaknesses of the reform experience," Cambridge Working Papers in Economics 1972, Faculty of Economics, University of Cambridge.
    7. Esplin, Ryan & Davis, Ben & Rai, Alan & Nelson, Tim, 2020. "The impacts of price regulation on price dispersion in Australia's retail electricity markets," Energy Policy, Elsevier, vol. 147(C).
    8. Simshauser, Paul & Akimov, Alexandr, 2019. "Regulated electricity networks, investment mistakes in retrospect and stranded assets under uncertainty," Energy Economics, Elsevier, vol. 81(C), pages 117-133.
    9. Khezr, Peyman & Nepal, Rabindra, 2021. "On the viability of energy-capacity markets under decreasing marginal costs," Energy Economics, Elsevier, vol. 96(C).
    10. Stephen Littlechild, 2019. "Promoting competition and protecting customers? Regulation of the GB retail energy market 2008–2016," Journal of Regulatory Economics, Springer, vol. 55(2), pages 107-139, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Simshauser, Paul & Whish-Wilson, Patrick, 2017. "Price discrimination in Australia's retail electricity markets: An analysis of Victoria & Southeast Queensland," Energy Economics, Elsevier, vol. 62(C), pages 92-103.
    2. Paul Simshauser and David Downer, 2016. "On the Inequity of Flat-rate Electricity Tariffs," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    3. Simshauser, Paul, 2016. "Distribution network prices and solar PV: Resolving rate instability and wealth transfers through demand tariffs," Energy Economics, Elsevier, vol. 54(C), pages 108-122.
    4. Stole, Lars A., 2007. "Price Discrimination and Competition," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 34, pages 2221-2299, Elsevier.
    5. Simshauser, P., 2019. "Lessons from Australia’s National Electricity Market 1998-2018: the strengths and weaknesses of the reform experience," Cambridge Working Papers in Economics 1972, Faculty of Economics, University of Cambridge.
    6. Nelson, Tim & McCracken-Hewson, Eleanor & Whish-Wilson, Patrick & Bashir, Stephanie, 2018. "Price dispersion in Australian retail electricity markets," Energy Economics, Elsevier, vol. 70(C), pages 158-169.
    7. Marc Möller & Makoto Watanabe, 2016. "Competition in the presence of individual demand uncertainty," RAND Journal of Economics, RAND Corporation, vol. 47(2), pages 273-292, May.
    8. Aguirre Pérez, Iñaki, 2011. "Multimarket Competition and Welfare Effects of Price discrimination," IKERLANAK 2011-55, Universidad del País Vasco - Departamento de Fundamentos del Análisis Económico I.
    9. Esplin, Ryan & Davis, Ben & Rai, Alan & Nelson, Tim, 2020. "The impacts of price regulation on price dispersion in Australia's retail electricity markets," Energy Policy, Elsevier, vol. 147(C).
    10. Mark Armstrong, 2005. "Recent Developments in the Economics of Price Discrimination," Industrial Organization 0511004, University Library of Munich, Germany.
    11. Rosa Branca Esteves, 2009. "A Survey on the Economics of Behaviour-Based Price Discrimination," NIPE Working Papers 5/2009, NIPE - Universidade do Minho.
    12. Simshauser, Paul, 2018. "Garbage can theory and Australia's National Electricity Market: Decarbonisation in a hostile policy environment," Energy Policy, Elsevier, vol. 120(C), pages 697-713.
    13. He, Qingxin & Zheng, Xiaoyong, 2020. "Price discrimination across different ticket distribution channels: Evidence from the US-china flight market," China Economic Review, Elsevier, vol. 61(C).
    14. Liu, Qihong & Shuai, Jie, 2013. "Multi-dimensional price discrimination," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 417-428.
    15. Asplund, Marcus & Eriksson, Rickard & Strand, Niklas, 2001. "Price Discrimination in Oligopoly: Evidence from Swedish Newspapers," SSE/EFI Working Paper Series in Economics and Finance 468, Stockholm School of Economics, revised 01 Jan 2007.
    16. Simshauser, Paul, 2019. "Missing money, missing policy and Resource Adequacy in Australia's National Electricity Market," Utilities Policy, Elsevier, vol. 60(C), pages 1-1.
    17. Jeong, Yuncheol & Maruyama, Masayoshi, 2018. "Positioning and pricing strategies in a market with switching costs and staying costs," Information Economics and Policy, Elsevier, vol. 44(C), pages 47-57.
    18. Esteves, Rosa-Branca, 2010. "Pricing with customer recognition," International Journal of Industrial Organization, Elsevier, vol. 28(6), pages 669-681, November.
    19. Czerny, Achim I. & Zhang, Anming, 2014. "Airport congestion pricing when airlines price discriminate," Transportation Research Part B: Methodological, Elsevier, vol. 65(C), pages 77-89.
    20. He, Qingxin, 2016. "The effect of competition on price discrimination in the international flight market between the U.S. and China," Economics of Transportation, Elsevier, vol. 7, pages 1-23.

    More about this item

    Keywords

    Price discrimination; electricity prices; jawboning;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • L9 - Industrial Organization - - Industry Studies: Transportation and Utilities
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cam:camdae:1849. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://www.econ.cam.ac.uk/ .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Jake Dyer (email available below). General contact details of provider: https://www.econ.cam.ac.uk/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.