DP2406 Can Competition Replace Regulation for Small Utility Customers?

Author(s): Richard Green

Publication Date: March 2000

Keyword(s): Competition , Regulation , Switching Costs , Utilities

JEL(s): L50 , L90

Programme Areas: Industrial Organization

Link to this Page: www.cepr.org/pubs/dps/DP2406.asp

Many utility markets are now being opened to competition, and some regulators have expressed the hope that this will make the regulation of consumer prices unnecessary. In this paper, entrants offer (differentiated) 'added value', but consumers incur a switching cost if they buy from one of them. The incumbent's profit-maximising price may be well above the level of its costs. This is likely to be the case in the UK's energy industries, but competition may be able to replace regulation in telecommunications, where marginal costs are lower, demand elasticity higher, and entrants can give more 'added value'.