Forecasting the market outcome on the Hungarian household electricity market after liberalizationUploaded: 1 of April, 2008

According to the Directive 2003/54 EC from July 1, 2007 all electricity customers including households should be free to choose supplier. It is a question what will happen on the household market which until now was supplied by regional monopolies. In our paper we design a model for forecasting the Hungarian outcomes after liberalization based on a switching curve calculated from households’ answers to a survey conducted in April 2007. Our model is a three-player Bertrand-oligopoly model where customers are heterogenic in their switching costs and the companies in their initial customer base. Since as we will show in this setting a Nash-Bertrand equilibrium does not exist, we turn to the undercut-proof equilibrium concept (UPE). We show analytically the conditions for having an UPE then derive numerically the solution for the Hungarian market. According to the results the supplier with the smallest customer base will tend to offer the lowest price, while the other two firms will price the same 19% higher price. This price difference will induce a 34% rate of consumer switching. Extending the model with new entrants shows that prices will be lower on the market than without the threat

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