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Why Higher Price Sensitivity of Consumers May Increase Average Prices: An Analysis of the European Electricity Market


Tobias Paulun


RWTH Aachen University - Institute of Power Systems and Power Economics

Eberhard Feess


Frankfurt School of Finance & Management gemeinnützige GmbH

Reinhard Madlener


RWTH Aachen University

November 2010

FCN Working Paper No. 16/2010

Abstract:     
We develop a model of the European electricity market that allows analyzing the impact of consumers' price sensitivity, defined as the willingness to change energy providers, on equilibrium prices. The model is parameterized with publicly available data on total demand, marginal costs and capacity constraints of power generators. Comparably precise data on the price sensitivity is not available, so that we analyze its impact in a range of simulations. Contrary to apparently straightforward expectations, we find that a higher price sensitivity increases average prices under reasonable assumptions. The reason is that, when price sensitivity is high, the most efficient energy providers can attract sufficiently many consumers for operating at full capacity, even when price differences to their less efficient competitors are small. Hence, incentives to reduce prices are higher when the price sensitivity is low. We conclude that the widespread view that high electricity prices can (partially) be attributed to a low willingness of consumers to change their providers is flawed.

Number of Pages in PDF File: 27

Keywords: Electricity Market, Price Sensitivity, Heterogenous Oligopoly, Price Competition, Capacity Constraints

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Date posted: December 19, 2010  

Suggested Citation

Paulun, Tobias and Feess, Eberhard and Madlener, Reinhard, Why Higher Price Sensitivity of Consumers May Increase Average Prices: An Analysis of the European Electricity Market (November 2010). FCN Working Paper No. 16/2010 . Available at SSRN: http://ssrn.com/abstract=1727271 or http://dx.doi.org/10.2139/ssrn.1727271

Contact Information

Tobias Paulun (Contact Author)
RWTH Aachen University - Institute of Power Systems and Power Economics ( email )
Schinkelstraße 6
Aachen, 52062
Germany
Eberhard Feess
Frankfurt School of Finance & Management gemeinnützige GmbH ( email )
Sonnemannstraße 9-11
Frankfurt am Main, 60314
Germany
Reinhard Madlener
RWTH Aachen University ( email )
Templergraben 55
52056 Aachen, 52056
Germany
+49 241 80 49 820 (Phone)
+49 241 80 49 829 (Fax)
HOME PAGE: http://www.eonerc.rwth-aachen.de/fcn
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