Cartel stability in the electric industry: the case of electricity distribution in Madrid in the interwar period

"This paper examines the reasons why the electricity Cartel in Madrid lasted for more than twenty years. The last competition period experienced by the electricity industry in Madrid was 1910 to 1913, when a price war took place. As a result a duopoly emerged, formed by the two companies that had close links to hydroelectricity producers. Cooperativa Electra Madrid (Electra) distributed the electricity of Hidroelectrica Espanola, and Union Electrica Madrilena (Union) was created in 1912 as a result of a merger of the largest and oldest electricity company in Madrid and a hydroelectricity producer. These two groups were to become major players in the Spanish electricity market during the twentieth century. Electra and Union signed an agreement to end the price war in which they established an equal share of the market. The competition had as a result overlapping distribution networks, which were maintained, and therefore the threat of competition was present from the beginning. Municipal, and later state, regulation played an important role in internal and external stability. Lowering the electricity rates conveyed the risk for the company of not being allowed to increase them again, which deterred free-rider behaviour amongst the two firms. As for external stability, regulation set prices below the monopoly level, and in doing so deterred new firms form entering the market and threatening its stability. Other external destabilising factors that could have come from competing industries, like gas, were neutralised. During the First World War, gas companies could not compete with electricity firms due to the sharp rise in coal prices. Afterwards the electricity companies controlled the gas companies. The factors considered for internal cartel stability range from demand elasticity and structure to the importance of the economic cycle through the cost structure. The economic cycle also helped cartel stability because demand was above supply until 1927. Last but not least, the reduced number of players meant lower costs both in negotiation and detection of free-rider behaviour. Nonetheless, problems emerged due to the particular relation of Electra with the municipality and the different structure of the two firms which induced different marketing strategies threatening cartel stability."