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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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JEL Codes: Q41: Energy: Demand and Supply; Prices, Q48: Energy: Government Policy, L13: Oligopoly and Other Imperfect Markets, L11: Production, Pricing, and Market Structure; Size Distribution of Firms, D22: Firm Behavior: Empirical Analysis, D21: Firm Behavior: Theory, D43: Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection, D12: Consumer Economics: Empirical Analysis, D11: Consumer Economics: Theory

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.