Tag: countervailing power

Centrica, owners of British Gas, has warned that electricity and gas prices in the UK are set to rise in the autumn. Centrica blames this on the expected rise in the costs of wholesale gas and other non-energy inputs.

One of the other ‘big six’ energy suppliers, E.On, has responded by saying that it will not raise energy prices this year. Whether it will raise prices after 1 Jan next year remains to be seen.

Last autumn, household energy prices rose substantially: between 15.4% and 18% for gas and between 4.5% and 16% for electricity. This spring, in response to lower wholesale energy prices, suppliers cut prices for either electricity or gas (but not both) by around 5%.

The government and various pressure groups are encouraging consumers to use price comparison sites to switch to a cheaper supplier. The problem with this is that supplier A may be cheaper than supplier B one month, but B cheaper than A the next. Nevertheless, switching does impose some degree of additional competitive pressure on suppliers.

More powerful pressure could be applied by ‘collective switching’. This is where a lot of people switch via an intermediary company, which sources a deal from an energy supplier. This collective buying is a form of countervailing power to offset the oligopoly power of the suppliers. Such schemes are being encouraged by the Energy Minister, Ed Davey.

The other approach, apart from doing nothing, is for Ofgem, the energy regulator, to impose tough conditions on pricing. But at present, Ofgem’s approach has been to try to make the market more competitive (see also), rather than regulating prices.

British Gas owner Centrica warns of higher energy bills BBC News (11/5/12)
E.ON to keep residential energy prices unchanged in 2012 Reuters, Adveith Nair (14/5/12)
E.ON promises to hold energy prices for 5million customers in 2012 This is Money, Tara Evans (14/5/12)
British Gas owner Centrica feels cold blast from critics ShareCast, John Harrington (11/5/12)
Gas and electricity price battle lines drawn BBC News (14/5/12)
Taking on the energy giants: The co-operative insurgency gains ground Left Foot Forward, Daniel Elton (11/5/12)
Group Energy Buying hits the UK Headlines Spend Matters UK/Europe, Peter Smith (11/5/12)
Think tank calls for competition to break Big Six rip-off Energy Live News, Tom Gibson (30/4/12)
Collective switching will not fix the UK’s broken energy market Guardian, Reg Platt (27/4/12)
Make your own small switch for cheaper energy The Telegraph, Rosie Murray-West (14/5/12)

Questions

  1. What are the barriers to entry in the electricity supply market?
  2. How competitive is the retail energy market at present?
  3. To what extent do price comparison sites put pressure on energy companies to reeduce prices or limit price increases?
  4. What scope is there for collective buying of gas and electricity from the six energy suppliers by (a) households; (b) firms?
  5. Assess Ofgem’s package of proposals for a simpler and more competitive energy market.

Oligopoly: it’s a complex market structure and although closer to the monopoly end of the ‘Market Structure Spectrum’, it can still be a highly competitive market. The characteristics are well-documented and key to the degree of competition within any oligopoly is the number of competitors and extent to which there are barriers to entry.

The greater the barriers and the fewer the competitors the greater the power the established firms have. This can then spell trouble for pricing and hence for consumers. The following articles are just some examples of the oligopolies that exist around the world and some of the benefits and problems that accompany them.

Articles

Oligopoly of PSU oil cos reason for high ATF prices The Indian Express, Smita Aggarwal (30/4/12)
Group energy buying hits the UK headlines Spend Matters UK/Europe(18/1/11)
German cartel office probes petrol companies on pricing Fox Business (4/4/12)
Gov’t unveils steps to lower fuel prices Yonhap News (19/4/12)
How big banks threaten our economy Wall Street Journal, Warren Stephens (29/4/12)
UK Governance: Call for Whitehall to simplify the landscape for SME suppliers to win more government contracts The Information Daily (26/4/12)

Other blogs
Pumping up the price: fuel cartels in Germany April 2012
Energy profit margins up by over 700% October 2011
Every basket helps October 2011
The art of oligopoly December 2010

Questions

  1. What are the assumptions of an oligopolistic market structure?
  2. Consider (a) the energy sector and (b) the banking sector. To what extent does each market conform with the assumptions of an oligopoly?
  3. In the ‘Spend Matters’ article, a group of people in a Lincolnshire village formed a local buying consortium to negotiate deals for heating oil. What could we refer to this as?
  4. To what extent is an oligopoly in the public interest?
  5. Explain how barriers to entry in oligopolies affect the competitiveness and efficiency of a market.
  6. Illustrate how an oligopolistic market structure can fix prices and hence exploit consumers.
  7. How have the actions of the big oil companies in both the UK and Germany been against independent retailers and the consumer interest?
  8. What action can governments take to break up oligopolies? Will it always be effective?

This podcast is from the Guardian. The first part consists of a report by Anna Dixon, Director of Policy at the King’s Fund (an independent ‘think tank’). The podcast considers “the economics of healthcare. Why are the Americans so opposed to adopt a system of socialised medicine? Does the NHS make economic sense? And how will the squeeze on public finances impact upon our most cherished of services?”

The Business: The NHS and economic recovery Guardian podcast (19/8/09)

Questions

  1. How do the UK and US healthcare systems differ?
  2. Why does the US system result in greater healthcare inequality than the National Health Service system in the UK?
  3. For what reasons may Americans resist healthcare reform?
  4. What lessons can be learned by the NHS from the US healthcare system?
  5. Compare the issues of monopoly power of drug companies, doctors and hospitals in the two systems? In which system is the countervailing power of purchasers likely to be greater?