Estimating Cost Pass Through in the UK’s Electricity Supply Chain

The structures of markets heavily impact consumer prices. As an example, oligopolistic market behaviour means a small number of large companies dominate a sector, and prices don’t necessarily reflect costs, meaning that the consumer pays an increased price. Economics seeks to ensure markets operate fairly and this is tied into consumer welfare given the pressing nature of current challenges such as cost of living and inflation. Dr Ivi Theodoulou is using econometrics to study economics and exploring the impact on society and welfare. In her PhD thesis, she explored market power and price transmission mechanisms in UK supply chains. This involved investigating the degree of market power held by retailers across three sectors: milk/dairy products, road fuels and electricity. She explored the oligopsonistic (retailers’ power over suppliers) and oligopolistic (retailers’ power over consumers) dynamics within these supply chains, and studied the cost pass through (CPT) mechanism for the three supply chains. She found evidence of asymmetric price transmission (APT), indicating that price increases are more readily passed on than price decreases, negatively impacting the consumer. CPT and APT are particular areas of interest for Theodoulou, with a focus on energy markets. In a 2024 study, she sought to estimate CPT and APT in the UK’s road fuels supply chain. She utilised a novel approach in the form of a statistical method that tracks delayed effects over time called a distributed lag econometric model; this was the first study of its time to apply this model to the UK road fuels sector.