How Far Does Economic Theory Explain Competitive Nonlinear Pricing in Practice?

Posted by D. Daniel Sokol

Stephen Davies (University of East Anglia - ESRC Centre for Competition Policy), Catherine Waddams Price (University of East Anglia - ESRC Centre for Competition Policy) and Chris M. Wilson (Economics - Loughborough University) ask How Far Does Economic Theory Explain Competitive Nonlinear Pricing in Practice?

ABSTRACT: Liberalisation of the British electricity market, in which previously monopolised regional markets were exposed to large-scale entry, is used to test the propositions of several recent theoretical papers on oligopolistic nonlinear pricing. Consistent with those theories, each oligopolist offered a single two-part electricity tariff, and a lump sum discount to consumers who purchased both electricity and gas. However, inconsistent with those theories, firms’ two-part tariffs are heterogeneous in ways that cannot be attributed to cost. We establish a series of stylised facts about the nature of these asymmetries between firms and use them to confront established theory.