ECON 308 Study Guide - Winter 2019, Comprehensive Final Exam Notes - Competition Law, Alternating Current, Market Power

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m. Peak-load pricing
i. Another price structure issue is the optimal price when there is
a time-varying demand for a single capital-intensive output
ii. This is the case of electricity, a non-storable commodity the
demand for which varies considerably over time
iii. Typically the demand for electricity can be divided between
peak, shoulder, and base load demand
iv. The costs are energy (variable) and capacity (fixed); TC = F +
cq
v. Here we simplify and assume two demands: (i) peak (Dp) and
(ii) off-peak (Dop) .The “optimal” set of prices (see next slide)
is:
1. off-peak purchases priced at marginal cost (c)
2. peak purchases would be priced to cover their marginal
cost (c) + all of the capacity costs (F = rK)
vi. This set of prices economizes on expensive capacity required
to serve peak users (Contrast with capacity needed if a single
price (p*) is set.)
vii. Also changes in peak demand send a signal when and how
much to alter capacity (next slide: “dashed” peak demand
curves in figure)
11. Path to deregulation
a. Even at the peak of regulatory intervention in 1960s and 1970s:
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i. there was little justification for regulation in transportation
industries (railroads, trucking, airlines, water transportation),
and others were
ii. outgrowing regulation (telecommunications; electricity
generation)
b. As a result, serious attention began to be given to deregulation in the
US in the mid-to late 1970s, and in Canada in the 1980s
c. In my lectures, I want to touch on some highlights of deregulation of
transportation, telecommunications, and electric power:
i. I will briefly touch on the highlights of transportation de-
regulation
ii. then I will turn to telecommunications, where deregulation
has been accompanied by continuing structural and
technological change
iii. in airlines, deregulation led to stiff competition; but global
shocks (e g, terrorism) and legacy (labour) costs have thrown
many carriers into bankruptcy
iv. in electric power, while deregulation at generation level
successful; but overall, unless carried out with great care it can
produce disastrous results
d. Some good papers on deregulation in the US are in AER May 2012 pp
381-395
e. Deregulation where competition was previously possible: the case of
transportation
i. By the 1960’s the transportation industries were good
examples of the private interest theory of regulation, and
provided examples where
ii. economic analysis predicted deregulation would improve
performance
iii. When deregulation arrived in airlines, trucking, railroads (and
to some extent pipelines) the newly injected competition freed
up:
1. fares/prices
2. entry and exit (including via merger)
3. choice of network configuration
4. choice of technology (e.g, railroads in US; airlines in
Canada)
iv. The new economic freedoms
1. led to a great variety of prices, reflecting demand as
well as cost factors
2. rationalization of networks—often into a “hub and
spoke” pattern
3. improved productivity, cost performance and in some
cases profitability
4. reduced cost-increasing non-price competition and
rent-seeking
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