The way markets are structured is critical to delivering an efficient allocation of resources. During the 1980's the movement to increase competition in markets in order to drive prices down and consumer service up was the basis of the privatisation and deregulation programme.
The idea is essentially that monopolies can exploit their customers and the more firms in the market the better it is for keeping costs and prices down.
In some markets economies of scale means you can't efficiently have hundreds of firms. One such market is energy supply, but you could certainly have up to 15 or 20. But when you have oligopoly market structures there is a tendency to collude and so some regulation to ensure fairness and maintain competition is needed.
So the energy market, dominated by six big suppliers, is one that might fall into a situation where they each decide not to compete too hard for business and all keep prices quite high.
Many people have been disappointed by recent high energy prices, some believe that the firms are keeping prices high when they need not. Others think that pricing is unfair with some people getting good deals while others (without Internet or able to pay by direct debit) pay too much.
So the government are introducing a new regime where there will be fewer price plans and customers will have to be put on the lowest available tariff.
This seems to be abandoning the idea of competition as a way of making sure resources are allocated efficiently.
The fear is that this will eliminate competition. The big firms will set similar but higher prices and while some people will be better off the good deals will disappear. The danger is that the government has just done the firms collusion for them and will prevent prices being forced down in the market.
Umar Ahmed
ReplyDeleteThere are many benefits and costs of the government’s new plans. The various benefits would be that people on outdated expensive energy plans will have updated cheaper plans, only 4 different tariffs which have to be either be a fixed rate deal or variable rate deal, and the other two can be decided by the supplier, this will be less complicated for customers so they can easily choose better deals for them so no unnecessary costs for them, customers will have personalised information about their bill so tariffs can be chosen. However this means this will eliminate completion so this oligopoly will set higher priced tariffs, so some people may end up paying more. However overall customers will be paying less, as tariffs will generally be cheaper and the right tarrif can be chosen increasing efficacy in the expenditure of households.
The continuous of growing in population means the more resources are consumed, the more scarce the resources will be, and prices will continue to rise. It is the law of supply and demand and it is the real issue that so many people ignore.
ReplyDeleteGovernment should be involved in such market to protect customers from the monopoly power. However at this moment there are too many tariffs and it is difficult for customers to work out the cheapest deal, but no matter what the government does to help people with this, it won't mean lower prices, as the government has to support the firms and not making them losing money.
Splitting into a 4 tariff means that there will be limited choice but this isn't necessarily a bad thing as the suppliers are forced to give us the best deal, with the ever-growing issue of scarcity we have to maximize the efficiency in the way we use our resources. We could also look at nationalising a company so that there is forced price change towards other companies to stay in the competitive market. However there has always been a big problem with the way in which energy is paid for by the average household, typically the people who pay in advance and use pre-paid meters are paying more than those who don't.
ReplyDeleteJoe Humphreys