Flexible prices make markets hum,
but discounts discriminate when monopolies rule.
Many expect that the electricity industry is moving inexorably toward a much-publicized "new competitive era." Companies, regulatory officials and experts all regard the momentum as powerful.
So far, the changes are just beginning, and there is a long way to go to reach fully effective competition. %n1%n Yet even at this early stage, the merger and pricing strategies adopted by the established electric firms may be threatening the prospects for competition.
Among these strategies, possibly the strongest weapon is strategic price discrimination for favored customers, which has already spread widely in the industry. The discounts are widespread, and often deep. Many also are secret and long-term. These conditions mean the discounts may well arrest or block the movement toward competition before it really gets going.
As a result, the shift toward effective competition may soon become stalled, even while the old monopolies still hold a high degree of market dominance (with a market share more than 50 percent). This dominance could prevent effective competition in many or most local power markets, and it could entrench many or most of the private utilities as near-monopolies. The hoped-for new competitive era may not, in fact, arrive. However, there is a solution (em regulatory action limiting use of such anti-competitive tactics.
Discounts are not always damaging
The incentives to discount are nearly universal. In many market settings, the discounting strongly promotes competition. Unfortunately, in other settings where there is market dominance, discounting by the dominant firm tends to suppress competition.