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  • 2021
  • Working Paper
  • HBS Working Paper Series

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

By: Alexander MacKay and Ignacia Mercadal
  • Format:Print
  • | Language:English
  • | Pages:57
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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; Energy; Markets; Governing Rules, Regulations, and Reforms; Price

Citation

MacKay, Alexander, and Ignacia Mercadal. "Deregulation, Market Power, and Prices: Evidence from the Electricity Sector." Harvard Business School Working Paper, No. 21-095, February 2021. (Revised January 2022. Direct download.)
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About The Author

Alexander J. MacKay

Strategy
→More Publications

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    What Drives Variation in Investor Portfolios? Evidence from Retirement Plans

    By: Mark Egan, Alexander MacKay and Hanbin Yang
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    Rising Markups and the Role of Consumer Preferences

    By: Hendrik Döpper, Alexander MacKay, Nathan H. Miller and Joel Stiebale
More from the Authors
  • Dynamic Pricing Algorithms, Consumer Harm, and Regulatory Response By: Alexander J. MacKay and Samuel Weinstein
  • What Drives Variation in Investor Portfolios? Evidence from Retirement Plans By: Mark Egan, Alexander MacKay and Hanbin Yang
  • Rising Markups and the Role of Consumer Preferences By: Hendrik Döpper, Alexander MacKay, Nathan H. Miller and Joel Stiebale
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