Explain how the energy companies have exploited their market power.

Start by outlining the type of environment in which energy companies operate in the UK. 1. The market structure is an oligoly. Each firm has a certain amount of market power it is able to exploit. Collusion is illeagle although if they do not communicate there is likely to be price leaders and followers. Price charged will be greater than marginal cost which generates a dead weight loss (a welfare loss to society). Only situation in which this does not occur is a perfectly competitive market (which in actual reality rarely exsists). 2. Energy firms in the UK are able to exploit their market power due to high barriers to entry and high sunk costs associated with entering the industry. Although they have come under alot of critism in recent years for passing on increases in fuel prices they rarely pass on reductions. However the profit margins in the industry do not indicate significant abuse of market power.