“Deregulation, Market Power, and Prices: Evidence from the Electricity Sector”
Coautoreado con Alexander MacKay
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. Thus, regulated prices may be preferred to market-based prices when firms are capable of exerting market power.
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