Reference no: EM132907759

Essay Writing

Case study: Monopoly energy supplier versus generic energy supplier:

Electricity is an essential service for consumers, commerce and industry. Because of this and, also because there are few practical substitutes for electricity, it has a low-price elasticity of demand. Consumers are prepared to pay for supply even when prices are raised to very high levels. This is another important factor creating market power for private owners of electricity assets. In addition, as an essential service electrical supply, at least in government ownership, is subject to universal provision - it is delivered nationwide even to regional and remote locations which would otherwise be uneconomic to service.

The electricity supply industry has the characteristics of a natural monopoly; there are large efficiency gains from vertical integration of supply; and there is a low-price elasticity of demand for the final output. Inherent in a commodity with these characteristics is the potential for significant abuse of market power by private owners. Historically and to the present, the objective of government in the ownership of electricity infrastructure is to supply an essential service at a reasonable cost; its objective is not to maximise profits that can be generated by these assets. Ultimately, under government ownership and operation infrastructure monopolies, in terms of pricing, reliability and adequacy of investment, are subject to the political and democratic process. Given these characteristics the global and Australian experience of privatised electricity markets is not a textbook model of competition, encouraging free entry and exit; numerous suppliers and perfect information to consumers. Instead with private local suppliers (with privatised formation and distribution license), energy markets are moving towards monopolistic competition.

Given this structure of the energy market, answer the following two questions:

Question 1: a) Explain how the electricity supply industry gains a natural monopoly? Consider the characteristics of natural monopoly in support of your response.
b) How should the price be determined by the monopoly energy supplier? Justify your answer with appropriate diagram/s.
c) Who are the winners and who are the losers under this market structure?

Question 2:

a) Explain how with energy supply market is gaining competitiveness but not leaning towards perfect competition, instead moving towards monopolistic competition?

b) How should the price of the energy supplied be determinedunder the monopolistically competitive structure? Justify your answer with appropriate diagram/s.

c) Who are the winners and who are the losers under this market structure?

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