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    Deregulation, Market Power, and Prices: Evidence from the Electricity Sector
    13 Apr 2021Working Paper Summaries

    Deregulation, Market Power, and Prices: Evidence from the Electricity Sector

    by Alexander MacKay and Ignacia Mercadal
    Efforts to deregulate the US electricity sector beginning in the 1990s included market-based prices and restructuring measures to introduce competition. This paper argues that electricity prices increased after deregulation because of the presence of market power.
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    Author Abstract

    When deciding whether to introduce market-based prices into a regulated market, a regulator faces the following tradeoff: profit incentives may reduce costs through the more efficient allocation of resources, but the presence of market power may lead to increased markups. We use a detailed dataset on electricity transactions to investigate the impact of market-based deregulation in the context of the US electricity sector. We find that the increase in markups dominates despite modest efficiency gains, leading to higher prices to consumers. Deregulation does not necessarily lead to lower prices to consumers. A consumer-oriented regulator may prefer to regulate rates to be consumer friendly, rather than let prices be subject to market power.

    Paper Information

    • Full Working Paper Text
    • Working Paper Publication Date: February 2021
    • HBS Working Paper Number: 21-095
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    Alexander J. MacKay
    Alexander J. MacKay
    Assistant Professor of Business Administration
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