You are working as an electricity market monitor at the Electric Reliability Council of Texas (ERCOT). Texas restructured its electricity industry in 1999. Regulators do not set wholesale prices in this market - the spot price is determined in a wholesale electricity market. Your first assignment is to analyze firm behavior during one hour last summer. There is concern that producers were exercising market power. You are asked to take a look at the data and assess whether you think there is evidence to suggest that firms were behaving competitively.
You are given the following information about the market conditions:
Total demand for electricity in the hour in question was 40,000 Megawatts (MW).
You are to assume that consumer demand for electricity is perfectly inelastic. (This is a fairly reasonable assumption in the short run. The majority of electricity consumers do not see" the electricity price in real time- they only see their electricity bill weeks later. Thus they do not respond to price changes in the short run).
Four large electricity firms and a "fringe" of small competitive firms supply this market.
Texas does not import or export power to/from other states. Assume that all power used to supply the market comes from either the 4 large players or the competitive fringe firms.
The observed wholesale price in the hour you are analyzing was $85/MWh.
Marginal Cost Capacity
Firm 1 20 15,000
Firm 2 35 15,000
Firm 3 40 10,000
Firm 4 42 10,000
fringe 0.01Qf 50,000
Required:
a. What price would you expect if firms were behaving competitively and setting price—marginal cost?
b. Compute the four different quantities that each of the four dominant firms would choose to supply if they were behaving as Cournot oligopolists.
c. What price would be consistent with this Cournot oligopoly?
Answers: 2
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