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In the News

Kinked demand curve: Energy price freeze

Graham Watson

1st December 2016

Here is a classic micro / market headline for a cold November morning! "British Gas to freeze standard energy tariff."

The fact that British Gas is following classic oligopoly theory, the kinked demand curve, in that when one oligopolist cuts prices, others follow suit. Arguably, neither firm has actually lowered its price but this announcement has been dressed up to look like this.

However, perhaps all is not what it seems. The big energy companies will have 'forward bought' almost all, if not all, of their energy and so we shouldn't be surprised that they can make such promises.

If you read the article you'll notice that the 'freeze' only last until next Spring, by which time the companies will have had to renegotiate their contracts. And depending upon what the pound has done, and what's happened to international oil and natural gas prices, you might well see prices rise in concert too.

Graham Watson

Graham Watson has taught Economics for over twenty years. He contributes to Tutor2U, reads voraciously and is interested in all aspects of Teaching and Learning.

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