Measuring Duopoly Power in the British Electricity Spot Market

TLDR

Two suppliers with inelastic demand dominate the British electricity industry, leading oligopoly models to predict prices well above marginal costs. The article empirically investigates market power in the British electricity market. Price‑cost markups are estimated using direct marginal cost measures and multiple cost‑free approaches. Estimates show prices exceed marginal costs but are far lower than theoretical predictions, with regulatory constraints, entry threat, and supplier‑customer financial contracts offering possible explanations. (JEL L13, L94).

Abstract

This article presents an empirical study of market power in the British electricity industry. Estimates of price-cost markups are derived using direct measures of marginal cost and several approaches that do not rely on cost data. Since two suppliers facing inelastic demand dominate the industry, most oligopoly models predict prices substantially above marginal costs. All estimates indicate that prices, while higher than marginal costs, are not nearly as high as most theoretical models predict. Regulatory constraints, the threat of entry, and financial contracts between the suppliers and their customers are considered as possible explanations for the observed price levels. (JEL L13, L94)