Pricing Policies Of The Retail Energy Market

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Price ceilings are one of the pricing policies used by the government to set limits on the maximum price a firm can charge for a product in a market (Perloff, 2004), for example, a price ceiling on tariffs in a retail energy market. Davis and Kilian (2011) explain that the retail energy market refers to a market in which gas, electricity and in some cases heating oil are purchased from manufacturers or as in most markets a sole manufacturer by suppliers to be supplied to households (consumers). The retail energy market in different countries can be classified under different market structures, quite often under a natural monopoly or a competitive market, though not perfectly competitive. Examples of both market structures in countries include Denmark and the United States of America, who operate under a Competitive retail energy market while Ireland and Singapore are examples of those under a natural monopoly (IPA Advisory Limited, 2015). The demand in the retail energy market is inelastic because electricity is a necessity for the welfare of a household as explained in many aspects by Coyne and Coyne (2015) and Davis (2014). Suppliers could use this to their advantage by pricing energy in the retail market beyond equilibrium to maximize profits, which is more likely to occur in a natural monopoly market. Consequently, the government imposes price ceilings onto the market to protect the interests of low income households by regulating the market usually through designated regulatory bodies. Additionally, they aim to ensure the market is operating at its optimum economic and allocative efficiency, through the Pareto improvement in a natural monopoly. This essay will, therefore, evaluate the effects of a price ceiling on a competit... ... middle of paper ... ...vel of control over the decisions made by regulators, which is why it can be speculated that the price ceiling may be a deliberate ploy by the retail energy market to increase supply and create demand for future price increment plans. In conclusion, aside from the economic and allocative inefficiency, price ceilings have adverse effects on their objective to protect the interests of low income households and promote efficiency. Which implies that they may have a different agenda or genuinely be inefficient. This can be avoided by opting to use other regulatory measures, particularly in the retail energy market regardless of the market’s structure. Given a situation where a price ceiling is the governments last option on regulating the retail energy market, of these two structures the natural monopoly will be economically less inefficient than the competitive market.

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