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

45 Pages Posted: 26 Feb 2021 Last revised: 6 Apr 2021

See all articles by Alexander MacKay

Alexander MacKay

Harvard University - Business School (HBS)

Ignacia Mercadal

Columbia University SIPA

Date Written: April 5, 2021

Abstract

When deciding whether to introduce market-based prices into a regulated market, a regulator faces the following tradeoff: profit incentives may reduce costs through the more efficient allocation of resources, 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 prices to consumers. Deregulation does not necessarily lead to lower prices to consumers. A consumer-oriented regulator may prefer to regulate rates to be consumer friendly, rather than let prices be subject to market power.

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 (April 5, 2021). 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

Columbia University SIPA ( email )

420 West 118th Street
New York, NY 10027
United States

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

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