You are required to analyze the UK energy supply market. You should consider all UK energy companies rather than a specific one, such as E.D.F. Your project should cover the following:
i) The trend in sales over the last 5 to 10 years. You need up-to-date data from sources such as Mintel or Keynote or Ofgem. (10 marks)
ii) Identify the structure of the market, including the main companies involved and their market shares. Other possible points to raise: Are there any significant barriers to entry? Is the market contestable?
Using economic theory show how a typical firm in this industry may set price and output in order to maximize profits.
Also, show how this may differ if a firm chooses to maximize sales revenue. Why may a firm prefer to maximise sales rather than profits? (Hint: you must use theory in this question) (30 marks)
iii) Explain how repeated games in game theory may show the optimum pricing strategy for firms in this industry. (Hint: you must use theory in this question) (25 marks)
iv) Outline the rationale for competition policy. Explain why there have been calls over the last two years for an investigation by the UK competition authority. What action do critics of energy companies propose? (Hint: you must use theory in this question) (10 marks)
v) What was the value of the UK pound (sterling) against the US dollar from January 2007 to May 2015? Using economic theory, explain this change in the pound’s exchange rate, particularly immediately after the financial crisis in 2008. How this change affects the price of energy in the UK.
(25 marks)
References include:
Sloman et al, Economics
Cole, ‘Tips on how to compare market structures’, Economics Today, January 2014
Ornaghi, ‘The energy market: Is it competitive?, Economic Review, April 2014
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