Now, received. There are two pure strategy Nash
Now, suppose ?^F<0< ?^A< ?^M. From the game tree above in Figure 2, we can see that if Player 1 chooses to Not Enter (N) the energy market, he receives a payoff of (0,?^M ). If Player 1 chooses to enter the energy market, Player 2 either plays A or plays F. If Player 2 chooses to Acquiesce, a payoff of (?^A,?^A) is received and if player 2 chooses to fight the entrant a payoff of (?^F,?^F) is received. There are two pure strategy Nash Equilibrium. One is (Enter, Acquiesce) because ?^A> ?^F which will give a better payoff to both players and the second pure strategy Nash Equilibrium is (Not Enter, Fight) because when we assume that Player 2 is definitely going to fight, the best response to that for player 1 is to not enter the energy market as it will get a higher payoff since 0> ?^F. The Nash Equilibrium in this model explains the way firms behave in this type of a market structure and stresses on the fact that either the new firm does not enter the energy market as the Big Six will fight or if it does, they accept it reluctantly indicating the high barriers to entry. Despite some significant entries to the energy market in the past few years, the new entrants are not yet making profits whereas the Big Six have had a decent profit margin of 4.5% in 2016.A major problem faced by the customers in this industry is that 58% of the consumers (also known as “sticky” consumers) have either never switched or only switched their supplier once due to asymmetric and imperfect information. It is quite prevalent in the energy sector as the consumers may be unaware of the cheaper or more reasonable services provided by another supplier. Switching and consumer engagement with different firms within the energy market results in achieving better outcomes for the market as a whole and creates a healthy competition resulting in better deals for the consumers. This also means that the more vulnerable customers are more likely to be on the expensive Standard Variable Tariffs (SVT) despite being less likely to be able to afford them. However, certain companies are taking advantage of the loyalty of consumers that are not switching by increasing their price in comparison to their rival firms giving them power over the inactive customers.A concerning issue faced by the consumers in the energy market is that of price discrimination as is prevalent in various oligopolies. This is mostly faced by domestic consumers or households that are on average paying more for the energy they consume. The Competition and Markets Authority (CMA) concluded that this is happening due to “weak customer response” giving Big Six the opportunity and market power to exploit the inactive consumers through price discrimination by increasing the price of the SVT and justifying it by differences in cost from the non-standard tariff or by justifying it by the costs incurred in running an efficient domestic retail business. It is evident from the above points that there is currently market failure within the energy industry as majority of the consumers are not satisfied with the price rise of energy and cannot afford to pay the ever-increasing bills. Government can use a strategy of placing price caps on the Standard Variable Tariffs (SVT) for the 66% of consumers on this tariff. This strategy was confirmed by Ofgem in February 2017 that there would be a variable and not frozen price cap imposed from April 2017. The level of the cap would differ by location and meter type and will be reviewed every 6 months to ensure accuracy until 2020. This would immensely help lower bills for 4 million of the vulnerable households this winter and reduced dual fuel bills by £60 a year which would enable them to spend their money on other necessities. Ofgem has also extended a safeguard tariff to a million people receiving Warm Home Discounts this winter. However, in order to compensate for the lower bills, the companies have to either let go of some staff to cut costs or make tariffs for the other customers more expensive or provide them poorer service for the existing price. Price caps have also indirectly made energy more expensive as the suppliers provide lesser energy and more inefficient services due to a lower price.Another strategy that can be undertaken by the government is to ensure that the “sticky” or inactive consumers are better educated about the energy sector and the available alternative options in order to get better value for their money. Due to the excessive asymmetric and imperfect information prevalent in the market among inactive consumers, the government can spread information about smart meters provided by British Gas for free that would help consumers understand the amount of energy and gas they are utilising in real time and send the British Gas accurate meter readings. This will help consumers understand how much they are using in pounds and help them decide whether they can get a better deal with another supplier. Other methods to reduce the existence of imperfect information that has been adopted by the government is to increase transparency of suppliers’ profits and costs by publishing reports and data online so that consumers can understand if they are paying more for their energy. Websites such as uSwitch are comparison websites that help consumers personalise their information and onto the website and compare prices and deals which helps them save switching or searching costs and get a better deal for their money. Such websites and apps provide information to customers for free which encourages them to switch suppliers for better deals, hence, giving suppliers an incentive to reduce their prices and improve quality in order to attract more customers. However, most of the methods implemented by the government are quite expensive and time consuming and still not a certain method to know whether it would have a major effect for the consumers. The strategies discussed above mainly talk about ways in which government intervention could help prevent market failures within the energy sector. Another strategy that could improve the market failure within the energy sector without government intervention is through recent events such as the confirmation of a merger between SSE and Npower which would result with the UK having 5 large firms instead of 6 and would make the new firm’s size to be roughly similar to that of the market leader, British Gas. This deal is being carried out in order to increase efficiency and innovation for consumers. The merger will increase competition in the market and create better deals for the customers as it would encourage other companies to offer better deals. In conclusion, there are many ways with or without government intervention that can improve market failure. Strategies such as the merger where there is no government intervention could provide better results than with government intervention as the introduction of price caps does not lay focus on reducing energy consumption which is a major concern raised by the industry, however, until the merger is actually implemented in July 2018 we cannot say for sure whether government intervention proves to be better.