Deregulation, Market Power, and Prices: Evidence from the Electricity Sector

57 Pages Posted: 26 Feb 2021 Last revised: 1 Feb 2022

See all articles by Alexander MacKay

Alexander MacKay

Harvard University - Business School (HBS)

Ignacia Mercadal

University of Florida

Date Written: January 31, 2022

Abstract

When deciding whether to introduce market competition in a regulated industry, a regulator faces an important tradeoff. Market-based prices can provide incentives to allocate resources more efficiently and reduce costs, but the presence of market power may lead to increased markups. We use a detailed dataset on electricity transactions to investigate the impact of market-based deregulation in the context of the U.S. electricity sector. We find that the increase in markups dominates despite modest efficiency gains, leading to higher consumer prices and lower consumer welfare. This effect is driven primarily by market power at the wholesale level. In some circumstances, regulated prices may be preferred to market-based prices when markets are not perfectly competitive.

Keywords: Deregulation, Market Power, Markups, Prices, Electricity

JEL Classification: L51, L94, D43, L13

Suggested Citation

MacKay, Alexander and Mercadal, Ignacia, Deregulation, Market Power, and Prices: Evidence from the Electricity Sector (January 31, 2022). Available at SSRN: https://ssrn.com/abstract=3793305 or http://dx.doi.org/10.2139/ssrn.3793305

Alexander MacKay (Contact Author)

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Boston, MA 02163
United States

HOME PAGE: http://alexandermackay.org/

Ignacia Mercadal

University of Florida ( email )

PO Box 117140
MAT 332
Gainesville, FL 32606
United States

HOME PAGE: http://https://sites.google.com/site/ignaciamercadal/

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