As noted in the chapter, separating the production of electricity from its delivery has led to considerable deregulation of producers.
a. Briefly explain which of these two aspects of the sale of electricity remains susceptible to natural monopoly problems.
b. Suppose that the potential natural monopoly problem you identified in part (a) actually arises. Why is marginal cost pricing not a feasible solution? What makes average cost pricing a feasible solution?
c. Discuss two approaches that a regulator could use to try to implement an average-cost-pricing solution to the problem identified in part (a).
(a) The production process remains more vulnerable than the distribution process due to its overpricing issue.
(b) Marginal cost pricing is inefficient since the price is always lower than the average.
(c) Rate of return and Service cost regulation.
The separation of electricity generation and delivery has resulted in significant deregulation of producers, and two components of power sales remain vulnerable to natural monopoly difficulties.
Deregulation of gas and power generation is becoming increasingly popular.
(a) The natural monopoly issue is concerned with inefficient pricing and underproduction. The production process remains more vulnerable than the distribution process due to its overpricing issue.
(b) Marginal cost pricing is inefficient since the price is always lower than the average. If the company continues to use marginal costing, it will lose money and eventually shut down. If the price is fixed at the average cost, enterprises will be able to cover their costs and produce at berak, resulting in no profit or loss.
(c) There are two aspects to deregulating natural monopolies:
- Rate of return. The rate of return pricing principle asserts that prices should be competitive without generating economic profits.
- Service cost regulation: According to this, the price should only cover the average cost in order to keep costs reasonable.
This theory is applied in natural monopolies, when prices are overcharged because average revenue is equated with price instead of marginal cost and revenue.
Recently, a food retailer called Whole Foods sought to purchase Wild Oats, a competitor in the market for organic foods. When the Federal Trade Commission (FTC) sought to block this merger on antitrust grounds, FTC officials argued that such a merger would dramatically increase concentration in the market for "premium organic foods." Whole Foods' counterargument was that it considered itself to be part of the broadly defined supermarket industry that includes retailers such as Albert sons, Kroger, and Safeway. What key issue of antitrust regulation was involved in this dispute? Explain.
An years past, firms around the world have secretly engaged in collusive agreements to restrain production and push prices above competitive levels.
Evidence compiled by government officials investigating such agreements has revealed that conspiring firms often utilize similar methods of establishing and enforcing collusive restraints of trade. Most agreements, for instance, assign to each firm an allowed market share, a permitted region of operations, or an approved set of customers. In addition, participating firms commonly are required to exchange sales information so that they can monitor adherence to their agreements to restrain trade. In this chapter, you will learn why firms that typically utilize these techniques to formulate and maintain collusive agreements engage in secret conspiracies: Such agreements are illegal under U.S. antitrust laws.
Distinguish between economic regulation and social regulation
Consider the following fictitious sales data (in thousands of dollars) for both e-books and physical books. Firms have numbers instead of names, and Firm generates only e-book sales. Suppose that antitrust authorities' initial evaluation of whether a single firm may possess "monopoly power" is whether its share of sales in the relevant market exceeds percent.
a. Suppose that the antitrust authorities determine that selling physical books and e-book selling are individually separate relevant markets. Does an initial evaluation suggest that any single firm has monopoly power, as defined by the antitrust authorities?
b. Suppose that in fact there is really only a single book industry, in which firms compete in selling both physical books and e-books. According to the antitrust authorities' initial test of the potential for monopoly power, is there actually cause for concern?
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