price-cost margin was justified (Offer, 1992), but by 1994, it was clear that the continuing fall in coal prices was not leading to a comparable fall in the Pool price. The subsequent inquiry concluded with a price cap on the annual average Pool price, to be ended by the sale of 6,000 GW of plant, as shown. That sale lowered concentration (from an HHI of just under 5,000 to just under 3,500), but did nothing to reduce the price-cost margin. Part of the explanation was that the plant had been sold under a leasing arrangement to the buyer, who had to pay £6/MWh for each unit sold. The defence of this was partly one of sharing risk (as the payment is only made when the plant successfully sells electricity) and partly to pay for the sulphur credits handed over with the stations, but had the effect of raising rivals' costs, encouraging them to support a high bid-price strategy in the Pool.

The Electricity Pool up to mid-1998 would seem to satisfy most of the criteria for collective dominance that would be likely to lead to tacit collusion. The market was concentrated (HHI above 3,000) and transparent (all prices were published the day ahead, and anyone could subscribe to Pool data giving the bids of each participant for each day). It was mature (with very low rates of growth); the product, electricity, was homogenous, produced by firms with similar or even identical plant and hence very similar cost structures. These costs were also transparent (mainly fuel costs whose prices were published). The demand elasticity was very low (even for those large customers who faced the Pool price), while a large fraction of electricity was sold at prices that were kept constant over periods of a year, despite huge variations in half-hourly prices. $ ^{16} $ The only criteria for likely collective dominance that the Pool failed to satisfy was that barriers to entry were low, and indeed entry was rapid. However, entry was by gas-fired plant running on base-load with contracts to distribution companies, and mostly bid a zero price into the Pool. They therefore did not participate in price setting. Over time the increase in capacity would undermine the prospects for tacit collusion, but the impact was gradual and not noticeable for the first seven years.

The other evidence to examine for tacit collusion is whether the prices remain high even when costs fall, and that was certainly the case. Fortunately, the extraordinary wealth of data about bidding behaviour in the Pool makes it possible to test for tacit collusion directly. Sweeting (2001) does this using bid data from each firm to see whether their bids are best responses to the bids of other firms. Fig. 1 divides up the time since privatisation into the relevant periods. During the first, from 1990-94, the duopolists offered to supply more at each price than would have been individually profit maximising, so if they were tacitly colluding it was to drive the prices lower, not higher. This is consistent both with the high initial contract coverage, and of tacit regulation. The duopolists might have reasoned that the exercise of market power would attract adverse regulatory activity, as it finally did in 1994. The two years of price control demonstrated the considerable ability of the companies to meet the price cap to within