The Effect of Default Rates on Retail Competition and Pricing Decisions of Competitive Retailers: The Case of Alberta

31 Pages Posted: 29 Aug 2017

See all articles by David Brown

David Brown

University of Alberta - Department of Economics

Andrew Eckert

University of Alberta - Department of Economics

Date Written: August 27, 2017

Abstract

We investigate the impacts of default regulated products and their design on the development of competitive retail markets and retailers' pricing decisions. We analyze this question in the context of Alberta's competitive retail electricity market, using data on the prices and characteristics of both regulated and unregulated retail products from July 2006 to March 2017. Our analysis consists of a descriptive discussion of the evolution of market structure in the industry, followed by an econometric analysis of the effect of default prices on unregulated retail prices. We find that as the default product moved from being a long-term stable product, to one based on short-term forward market prices, the number of products and competitors increased substantially. This suggests that the change in the default product was successful at facilitating the development of a competitive retail market. However, our econometric analysis of the pricing of unregulated contracts suggests that competitive retailers may continue to exercise market power by adjusting prices upward in response to short-term changes in the regulated rate, even after controlling for changes in the costs of providing retail products.

Keywords: Electricity, Retail Markets, Market Power, Regulation, Default Rates

JEL Classification: D43, L51, L94, Q40

Suggested Citation

Brown, David and Eckert, Andrew, The Effect of Default Rates on Retail Competition and Pricing Decisions of Competitive Retailers: The Case of Alberta (August 27, 2017). USAEE Working Paper No. 17-319, Available at SSRN: https://ssrn.com/abstract=3027707 or http://dx.doi.org/10.2139/ssrn.3027707

David Brown (Contact Author)

University of Alberta - Department of Economics ( email )

8-14 Tory Building
Edmonton, Alberta T6G 2H4
Canada

Andrew Eckert

University of Alberta - Department of Economics ( email )

8-14 Tory Building
Edmonton, Alberta T6G 2H4
Canada

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