Thisarticle is about the rise in price of dual fuel in UK, the combination ofelectricity and gas provided by the same energy supplier. According tothe article in UK there are six big energy companies that dominate the market. Amarket structure controlled by a small number of large firms is calledoligopoly, they could be differentiated or homogeneous depending on if the goodsor services they offer are different or equal the ones each firm in that marketprovides, in this situation the market is homogeneous because provideselectricity and gas.
In an oligopoly, there is a mutual interdependence, decisionstaken by a one firm affect other firms in the industry, so they depend on each other. As thearticle says, SSE has become the last one of the big six to raise its prices “dualfuel prices will go up by 6.9% or 73£ a year for the dual fuel bills of 2.
8million standard tariff customers from the end of April.” Usually in anoligopoly when a firm hikes prices all the other firms don’t follow it keepingtheir prices still, so that firm will lose revenue because consumers will beattracted from the lower prices of competitors, while if a firm lowers itsprices the others will follow it in order not to lose revenues, but if all thefirms of an industry drop their prices they will have the same market share asbefore but less incomes, this event can be represent with a kinked demand curve.So, in an oligopoly there the price should be inflexible. If theprice rose up it may be due to a rise in costs of production as shown in the diagrambelow (For simplicity,the diagram is about the gas market, but we have to consider also theelectricity one because it is the dual fuel price that increased): Gasmarket If thecosts rise the marginal cost, the cost added by producing one additional unitof a good or service, would rise too changing the price. This happens becauseif a firm produces at Q1, where the profit maximisation point is MC1=MR and theprice at P1, and the MC cost shifts from MC1 to MC2 the maximisation pointmoves to MC2=MR bringing the price at P2, which is higher than P1. Anotherpossible reason for the rise in dual fuel prices could be a collusive behave.In an oligopoly, firms can avoid competition attempting collusion, an agreementusually illegal between rivals, if they do so they would act like a monopolyand achieve higher profits.
Collusion could be formal, when agreements aren’t hidden,informal, when it is secret in order to avoid detection by regulators, andtacit, when there is a leading firm and all the others follow it. Gasmarket In this situation,the demand curve isn’t kinked because the collusion consists in acting like amonopoly. Also here the MC shifts from MC1 to MC2 causing a change in the profitmaximisation point (MC1=MR à MC2=MR) and so the price increases. The mainissue is that consumers are suffering for the high prices and the big six aretaking advantage of them. Martin Lewis, founder of MoneySavingExpert.com says: “everyone on a standard tariff fromthe big six, including British Gas, is being ripped off,” A solution proposed byJohn Penrose, a former minister at the Cabinet Office and a Conservative MP, is to introduce a pricecap to the standard variable tariffs.
The price cap is represented in thediagram below: Gas market Assuming that themarket produces at Q1 and P1 where MC=MR1, when the price is introduced itbecomes the new MR