Working Group III: Mitigation

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5.3.5 Market Structure and Functioning

Market failures related to pricing, information and institutional imperfections are discussed elsewhere in this section. In this subsection a variety of other barriers and opportunities related to the behaviour of market actors and the features of specific markets are considered. The majority of these opportunities and barriers affect the demand for higher energy efficiency, but in many developing and transitioning countries there are also problems on the supply side of markets.

In considering opportunities and barriers related to market behaviour and features, it is important to recognize that consumers (broadly defined to include households, firms, and other actors) and producers and/or providers in specific markets are in continual communication. In general, suppliers deliver what they think consumers want. But in markets characterized by a high degree of inertia or aversion to risk on the part of suppliers, there may be latent demand for higher levels of energy efficiency than are readily available in the market. Suppliers may not expend the effort to cultivate the demand for more efficient products or to develop marketing approaches to help overcome some of the barriers on the demand side (such as financing schemes).

The importance of particular barriers varies among specific markets. On the demand side, barriers tend to be greater with respect to households and small firms than with large companies, who are more able to evaluate investments. Similarly, in markets where the supply side is heavily comprised of small firms with low levels of technical, managerial, and marketing skills, the barriers tend to be higher.

Network Externalities
Some technologies operate in such a way that any given user’s equipment interacts with the equipment of other users so as to create what economists call network externalities (David, 1985; Katz and Shapiro, 1986). For example, since vehicles must be refuelled, the attractiveness of vehicles using alternative fuels is very dependent on the availability of convenient sites for refuelling. Furthermore, the development of a rich infrastructure devoted to distributing any given fuel is, in turn, dependent on there being sufficient vehicles using that fuel to generate a large demand for that infrastructure. This need to create an interacting network of equipment and infrastructure can be a barrier to the diffusion of new technology, in that a potentially superior technology may have difficulty diffusing because of the lack of necessary infrastructure, while the diffusion of the infrastructure is impeded by the low diffusion of the new vehicles.

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