Joseph Thomson
UK Energy Market Context Questions Wednesday 13th November 2019
Q1. 1420 - 1145 = 275
= 0.24017467248
0.24017467248 * 100 = 24.02% (2 d.p.)
Q2. In exploiting their market power, firms often set prices above marginal cost, reducing
allocative efficiency and enabling them to earn more profit.
In Extract A, this is shown in the difference between 2013 and 2009. In 2009, the cost of energy
per bill was £615 and by 2013 this had increased to £635 per bill. Whilst this would then explain
a slightly increased household bill, the bill actually rose by a massive proportion in comparison,
where in 2009 household bills were £1145 on average and rose to £1420 on average by 2013.
This high increase in average household bills compared to the rise in cost then enabled a much
higher profit of £95 per bill in 2013 compared to £10 per bill in 2009.
This data shows that the energy companies are able to set prices at whatever level they
choose, as demand is inelastic, and have used massive price increases to increase their profits.
Q3. Collusion takes place within an industry when rival companies cooperate for their mutual
benefit, and it often happens in narrow market structures like oligopolies, where this joint effort
can have massive impacts on the markets. Firms often do this to reduce business uncertainty,
where they create price fixing cartels. It would seem this has been done in the energy market,
where all of the largest firms have similarly high prices, and are ‘slow to reduce them when
market conditions change’ (Extract B). This behaviour is considered illegal by UK and European
competition law, however as shown by OFGEM’s lack of evidence it can be hard to prove that a
group of firms have deliberately joined together to increase prices.
Horizontal collusion in the energy market could be achieved easily as there are few firms in the
market and demand is inelastic, where energy is a necessity. Through price fixing, firms could
maximise joint profits, increase producer surplus and cut some competition costs. In the
diagram below, it is shown how firms could utilise their control over supply at the same point in
production, and restrict output from Q1 to Qm, which raises prices from P1 to Pm, reflecting the
price and output of a monopoly.
UK Energy Market Context Questions Wednesday 13th November 2019
Q1. 1420 - 1145 = 275
= 0.24017467248
0.24017467248 * 100 = 24.02% (2 d.p.)
Q2. In exploiting their market power, firms often set prices above marginal cost, reducing
allocative efficiency and enabling them to earn more profit.
In Extract A, this is shown in the difference between 2013 and 2009. In 2009, the cost of energy
per bill was £615 and by 2013 this had increased to £635 per bill. Whilst this would then explain
a slightly increased household bill, the bill actually rose by a massive proportion in comparison,
where in 2009 household bills were £1145 on average and rose to £1420 on average by 2013.
This high increase in average household bills compared to the rise in cost then enabled a much
higher profit of £95 per bill in 2013 compared to £10 per bill in 2009.
This data shows that the energy companies are able to set prices at whatever level they
choose, as demand is inelastic, and have used massive price increases to increase their profits.
Q3. Collusion takes place within an industry when rival companies cooperate for their mutual
benefit, and it often happens in narrow market structures like oligopolies, where this joint effort
can have massive impacts on the markets. Firms often do this to reduce business uncertainty,
where they create price fixing cartels. It would seem this has been done in the energy market,
where all of the largest firms have similarly high prices, and are ‘slow to reduce them when
market conditions change’ (Extract B). This behaviour is considered illegal by UK and European
competition law, however as shown by OFGEM’s lack of evidence it can be hard to prove that a
group of firms have deliberately joined together to increase prices.
Horizontal collusion in the energy market could be achieved easily as there are few firms in the
market and demand is inelastic, where energy is a necessity. Through price fixing, firms could
maximise joint profits, increase producer surplus and cut some competition costs. In the
diagram below, it is shown how firms could utilise their control over supply at the same point in
production, and restrict output from Q1 to Qm, which raises prices from P1 to Pm, reflecting the
price and output of a monopoly.
