Market power and heterogeneous pass-through in German electricity retail

Abstract

We analyze the pass-through of cost changes to retail tariffs in the German electricity market over the 2007–2014 period. We find an average pass-through rate of around 60%. This significantly varies with demand factors: while the pass-through rate to baseline tariffs, where firms have greater market power because customers are less willing to switch, is only 50%, it increases to 70% in the competitive segment of the market. Although the pass-through rate of independent firms is significantly higher than that of other firms in the competitive market segment, the extent of supply-side heterogeneity is limited. Thus, the firms’ ability to exercise market power and reduce pass-through appears to be constrained by competition and largely determined by demand side factors. Finally, we find that the pass-through rate in the competitive market segment has been approaching unity over the past years, indicating a rise in competitive pressure.