From Liberalization Towards Integration: Have Markups of EU Electricity Firms Changed?

Abstract

This paper presents an ex-post empirical analysis of the impact of European electricity market reforms on markups of firms. The working hypothesis is that further economic integration would bring competition into electricity markets reflected by lower markups of electricity firms. The results show that reforms have gradually reduced the markups, but the markup premium of incumbent firms is on average larger than theoretical models would predict under effective economic integration. Considering regional proximity and heterogeneity of firms along the supply chain, the results suggest that better market access and cross-border arbitrage disciplined the markups, but have not led to competitive market outcomes due to prevailing market concentration and insufficient unbundling of transmission and distribution channels.

Keywords: Economic Integration, Electricity Firms, EU, Price-Cost Margins, Service Market Regulation

JEL Classification: F10, L11, L51, L94