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What price would you expect if firms were behaving competitively and setting price=marginal cost?
Compute the four different quantities that each of the four dominant firms would choose to supply if they were behaving as Cournot oligopolists.
What price would be consistent with this Cournot oligopoly?
Based on your answers above, what would you say about the conduct of the large firms in this market? Are firms behaving competitively? Discuss factors other than market concentration that could be affecting the wholesale electricity price.
Question 4: ESG warm upYou 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 wholesaleprices 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 assesswhether 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 afairly 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. Thusthey 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 usedto 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. Finally, you are given the following information about the costs and capacities. marginal cost capacity WMW) (MW)ﬁrml 20 15,000m2 35 15,000ﬁrm3 40 10,000ﬁrm4 42 10,000fringe .0101f 50,000 Note that whereas the dominant ﬁrms all have constant marginal costs, the marginal costs of thecompetitive fringe is represented by the cost function me): = 00162;.
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