Resource externalities and the persistence of heterogeneous pricing behavior in an energy commodity market

a r t i c l e i n f o In competitive product markets, repeated interaction among producers with similar economic characteristics would be expected to result in convergence of their behaviors. If convergence does not occur, it raises fundamental questions related to the sustainability of heterogeneous competitive strategies. This paper examines the prices submitted to the British wholesale electricity market by four coal-fired plants, separately owned, approximately of the same age, size and efficiency, and located in the same transmission network zone. Due to the repetitive nature of the spot market, one would expect convergence in strategies. Yet, we find evidence of persistent price dispersion and heterogeneous strategies. We consider several propositions for these effects including market power, company size, forward commitments, vertical integration and the management of interrelated assets. The persistence of heterogeneity in product markets poses questions of efficiency, contestability and competitiveness, as well as those related to sustainable strategic differentiation. From a product pricing perspective , considerations of customer segmentation e.g. with respect to market power and price elasticity, as in Ramsey (1927), have been widely applied to understand stable price discrimination, while the resource-based view, e.g. Wernerfelt (1984), has contributed to a prolific body of theory on the competitive advantage that sustains a long-term differentiation in assets and capabilities among producers. Thus, with homogeneous products, the analysis of sustained heterogeneous pricing has often been motivated by transactional or behavioral considerations related to the customer or the customer–producer relationship. These in-as well as preferences to deal with particular counterparties (Becker, 1975; Kirman and Vriend, 2001). Yet, if we look at a commodity product , sold in a competitive wholesale market, perhaps anonymously on both sides through an exchange, with no brand value, no price–quantity variations (leading to discounts), equally accessible at the same transaction costs to all consumers, produced by different companies with the same technologies and marginal costs, we would generally expect to see convergence to similar prices being offered by the producers. If price heterogeneity emerges persistently in such a context, the relevant externalities may be quite subtle. In this paper we look at the case of wholesale electricity from this perspective, which is a product market of considerable social and economic impacts. While it is well known that power markets tend not to be perfectly competitive, with the market power effects leading to higher than marginal cost clearing prices, nevertheless, the repeated …