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Nonlinear Pricing and Tariff Differentiation: Evidence from the British Electricity Market

Abstract:
Liberalisation of the British household electricity market, in which previously monopolised regional markets were exposed to large-scale entry, is used as a natural experiment on oligopolistic nonlinear pricing. Each oligopolist offered a single two-part electricity tariff, but inconsistent with current theory, the two-part tariffs were heterogeneous in ways that cannot be attributed to explanations such as asymmetric costs or variations in brand loyalty. Instead, the evidence suggests that firms deliberately differentiated their tariff structures, resulting in market segmentation according to consumers' usage.

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Keywords: Price discrimination, Two-part tariffs, Segmentation, Oligopoly, Electricity

DOI: 10.5547/01956574.35.1.4

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Published in Volume 35, Number 1 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.