February 19, 2020

Oligopoly in Action!

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Image by through dans eye via Flickr

Domestic energy users in the UK are able to “choose” their supplier from a number of different companies. While there are some fledgling companies offering utilities services to consumers the market is dominated by the “big six” companies.

Switching between companies involves signing a contract and sitting back and waiting. You also have to send your electricity and gas meter readings away on the day of “switchover”. It is a comparatively simple process unless you owe money to your supplier. There are even websites that offer price comparison services (see here for an example) so the information is there for the consumer to decide if they are getting a good deal. I’ve switched utilities supplier three times in the last five years!

For those in countries with monopoly-controlled utilities markets, this must sound very competitive. Compared to some utilities markets it certainly is, but it’s a long way from a perfect market (discussed here in the EBS course text).

Recent headlines have announced that each of the “big six” will put up their prices for electricity and gas by varying amounts over the next few months. This BBC article has a telling timeline of price increases over the past year or so. It’s interesting to note that EDF Energy have been last to put their prices up in both “rounds” of price increases, possibly hoping to benefit from the price differential for a short period of time?

The energy market in the UK is a classic oligopoly (discussed here in the EBS course text) which, as we know, does not result in efficient resource allocation. One of the things that dampens down competition is the complexity and variety of different pricing options available to the consumer. The energy regulator, Ofgem, announced a few months ago that they wanted to overhaul the domestic market for electricity and gas to encourage more competition.

Will it work?