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Anti-Competitive Impacts of Secret Strategic Pricing in the Electricity Industry

Fortnightly Magazine - February 15 1997

nearly killed off Control Data (em as IBM hoped. But IBM also set much higher price- cost margins to small, uninformed buyers, where the competition was weak. These small buyers virtually were "captive" customers, who would buy "an IBM machine" at almost any price.

• Airlines. Another, well-known current example of pricing that extracts all consumer surplus from individual customers is airline pricing. Anti-competitive pricing in the airline industry has become perhaps more extensive and refined than any other instance in business history, and has been going on since 1978.

• Automobiles. Most automobiles are well-known to be sold often at low price-cost margins, while the spare parts are sold at much higher mark-ups over cost.

Antitrust impacts have also resulted from such companies as United Shoe Machinery, Xerox, and now Microsoft, for that matter.

Additional reading

For a comprehensive discussion of price discrimination, including some of the static profit-maximizing features and as some of the dynamic competition-affecting aspects, read The Political Economy of Monopoly, by Fritz Machlup, Industrial Market Structure and Economic Performance, by F.M. Sherer and David N. Ross, and The Economics of Industrial Organization, by William G. Shepherd.

Table 1. Discount Prices to Large Electricity Customers, by Five Selected Utility Firms (as of April 1996)

Utility BOSTON NIAGARA DETROIT CONSUMERS PACIFIC GAS

Firms EDISON MOHAWK EDISON POWER & ELECTRIC

Customers Any of the largest To 72 large GENERAL GENERAL Some of the

12 customers if companies MOTORS, MOTORS 100 largest

they show an including: FORD, DOW Several

intent to move LOCKHEED, CHRYSLER CORNING, customers,

out of state CHURCH & UPJOHN including:

Already includes: DWIGHT EXXON,

RAYTHEON, CHEVRON,

POLAROID, HEWLETT- DIGITAL PACKARD

EQUIPMENT

Discounts 20 percent, for up $66 million 10-20 per- 10 percent, $70 million to 4 years per year cent at 54 for 5-10 per year plants for years 10 years

Source: Agis Salpukas, "Utilities Rewrite the Rate Card,"

New York Times, April 5, 1996, pp. D1, D6.

Table 2. Selected Additional Permissive Regulatory Rules or Instances of Price Discrimination (as of September 1996)

STATE ARIZONA CALIFORNIA ILLINOIS INDIANA MASSA- MISS- NEVADA

and Mar. 1996 Oct. 1995 Oct. 1995 Sep. 1995 to CHUSETTS ISSIPPI by 1996

Date Jan. 1996 July 1996 by 1996

Conditions Pricing Flexibil- The Public There are special Approved at Scores of secret Permits secret Permits

Imposed, ity Rider Rate Utilities Com- contracts with least three discounts have electric utility discount

If Any No. 79. Permits mission at least 11 special dis- been approved discounts. rates but not "negotiated approved a large customers counts for by the regulatory secrecy. prices" under set of "pre- Secrecy was large customers agency a "comparative approved gen- barred in 1995 on a business- tariff. eric discount" by the Illinois retention basis. "Formally contract-rate Appellate Court, limited to options for but legislation business- large industrial to allow secret retention and commer- rateswas passed situations. cial customers. by legislature in July 1996.

Formally, special rates can be offered only to prevent "uneco- nomic bypass."

NEW NEW NEW OHIO OKLAHOMA PENNSYL- UTAH WASHINGTON

HAMPSHIRE JERSEY MEXICO Spring 1995 June 1995 VANIA since 1992 by