Robin Matthews is professor at universities in London and Moscow; consultant with international companies; writes on business, economics; and finance: creative imagination techniques in management.
Flummox pricing by energy giants
Flummox pricing by energy giants
A version of Social Darwinism is an unacknowledged, perhaps unconscious, a priori in business, politics and policy. Social Darwinism was always a misreading of Darwinism. Today’s version is that competition (confused with the market), results in a kind of social fitness that shakes out inefficiency. Competition is said (for example by Mr Cameron and I doubt if labour really think differently) to be the solution to energy price inflation. But the energy sector is a case of classic oligopoly; competition among the few.
Competition that has anything to do with efficiency, in the restricted way that economists define efficiency, is confined to competition among the many; an imagined situation where there are so many firms that particular firms are unable to influence price either by (a) increasing or decreasing their own output or (b) colluding with other firms to increase or decrease output collectively. This imagined state is described as atomistic or perfect competition.
Market is used as if synonymous with competition; not so. Competition describes the state that the market is in, the number of rival firms: one firm, monopoly; a few firms oligopoly; a fairly large number of firms, monopolistic competition; a very large number of firms, perfect or atomistic competition. In all but the last, individual firms are able to influence price, either by (a) increasing or decreasing their own output or (b) colluding with other firms to increase or decrease output collectively.
Energy pricing in the UK is so complicated that you could say that rivalry in the energy sector is limited to rivalry among the few oligopoly energy firms to make tariffs incomprehensible enough to look as if they were competing; flummox pricing.
Classic oligopoly was written about by Paul Sweezy in 1939. Energy giants fix flummox prices tacitly; collusively. Flummox prices differ; firms compete with each other to flummox; real prices are fixed to maximise profit; flummox prices camouflage real prices; costs of switching from one supplier to another lock customers in. There may be a variety of prices but they amount to the same thing: energy products, conditions of service, value for money or what you get for your money is the same.
I hear people say, “Yes, energy prices are high, but margins are low.”Mitigation, not so. If you sell billions of units at low margins, and keep raising prices, profits are high.
Adam Smith said that surveillance of collusion is difficult. Profiteering, at whatever the cost to anyone else, is hard wired into the brain of energy bosses. Hard wired, like misrepresentations of new Darwinism, markets and competition are, in business, politics and policy.
If you not acquainted with Paul Sweezy’s paper, here is an explanation, if you are interested. Flummox prices are my phrase not his.
A variety of flummox prices F correspond to the effective price E in the left hand diagram. Flummox prices seem to correspond to different real prices but they don’t. Once fixed in the short term, though they may introduce another range of flummox prices, the effective price E to customers is unchanged. Sweezy demand curves are bent or kinked at E. He argued that if a colluding firm A raised its effective price rivals wouldn’t follow, so A would lose a lot of customers and if A lowered its effective price, many would follow and not many customers would be gained. Lowering or raising prices in the short term doesn’t pay; revenue is lost. In economic jargon, demand is elastic for price increases and inelastic for price reductions. On the right hand side demand curves drift up annually, E, E*, E**, at a rate higher than inflation.
 Sweezy, P. M. (1939). 'Demand Under Conditions of Oligopoly', Journal of Political Economy, 47, pp. 568-573.