Do Markets Reduce Prices? Evidence from the U.S. Electricity Sector

62 Pages Posted: 26 Feb 2021 Last revised: 2 Apr 2024

See all articles by Alexander MacKay

Alexander MacKay

Harvard University - Business School (HBS)

Ignacia Mercadal

University of Florida

Date Written: March 30, 2024

Abstract

We construct a novel dataset on electricity generation, wholesale transactions, and retail sales to assess the shift from cost-of-service regulation to deregulated, market-based prices in the context of the U.S. electricity sector. Consistent with earlier studies, we find that the costs of generation fell in deregulated markets. However, despite lower generation costs, wholesale prices increased along with utilities' overall expenses on energy. The resulting increase in utility costs can explain a substantial portion of the increase in downstream retail prices. Overall, we estimate that the increase in wholesale margins more than offset the efficiency gains, which can occur when markets are not perfectly competitive.

Keywords: Deregulation, Markets, Market Power, Electricity

JEL Classification: L51, L94, D43, L13, L43, Q41

Suggested Citation

MacKay, Alexander and Mercadal, Ignacia, Do Markets Reduce Prices? Evidence from the U.S. Electricity Sector (March 30, 2024). 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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