Deregulation, Market Power, and Prices: Evidence from the Electricity Sector

Alexander MacKay and Ignacia Mercadal

April 2022

When deciding whether to introduce market competition in a regulated industry, a regulator faces an important tradeoff. Market-based prices can provide incentives to allocate resources more efficiently and reduce costs, but the presence of market power may lead to increased markups. We use a detailed dataset on electricity transactions to investigate the impact of market-based deregulation in the context of the U.S. electricity sector. We find that the increase in markups dominates despite modest efficiency gains, leading to higher consumer prices and lower consumer welfare. This effect is driven primarily by market power at the wholesale level. In some circumstances, regulated prices may be preferred to market-based prices when markets are not perfectly competitive.

Keywords: Deregulation, Market Power, Markups, Prices, Electricity
JEL Classification: L51, L94, D43, L13, L43, Q41