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Oligopoly strikes again!

Dr Craig Robinson, Director of Learning and Teaching

Faculty Blog

English: Sunset at Royd Moor Wind Farm

(Photo credit: Wikipedia)

I've been listening to the radio intently on my drive to work every morning this week. Every time there is a news update I cannot help but think about a couple of blog posts I wrote more than a year ago about the oligopolistic nature of the UK utilities market. You can find them here and here. It seems that nothing has changed.

In the UK we are able to choose from a total of six companies to supply electricity and gas to our homes. This is the classic case of competition among the few - an oligopoly. Companies operating in an oligopoly are always concerned about what competitors are up to. Changes in prices have an impact on everyone’s behaviour.

Back in October the electricity companies started to put prices up, all more or less by the same amount. This has caused quite a furore in the media and has even resulted in senior management being called before a parliamentary committee to explain themselves which you can see in the video at the bottom of this article. British Gas, one of the “big six” energy companies, had some PR trouble when it put prices up last month. My colleague Jane had something to say about that here.

Classic kinked demand curve theory suggests that if one competitor puts their prices up, others will not follow suit and allow the player with higher prices to lose customers. This is not exactly what has been happening in practice, until this week. Four of the companies have put their prices up by around 9%, but this week EDF Energy announced that they will only be putting their prices up by around 4%. By holding down the price increase it is clear that EDF is hoping to attract customers away from its competitors.

It will be interesting to see what happens in the market. The government is now looking at changes to regulations, including making it easier to switch (sounds like an attempt to increase the bargaining power of buyers) and investigations into the competitive practices in the market. Even so I suspect this is not the last we have seen of this oligopoly in action…