Power to the People -- At Reduced Prices
Subject Comparisons with perfect competition
Topic Monopoly
Key Words Deregulation, market, new firms, efficiency, economies of scale, prices, consumers, suppliers, producers, demand
News Story

The energy industry has been deregulated. New firms, like GreenMountain.com and NewPower, are entering the market. Many act as third-party suppliers, buying and reselling gas and electricity. The notion behind deregulation is that the growth in suppliers will force companies to compete; they will look for ways to increase efficiency, including reaping economies of scale such as buying power in bulk, and therefore prices will be lower.

Consumers can find out about different suppliers and their prices by logging on to Web sites such as Energyguide.com. NewPower guarantees savings of 15-25 percent. Thus Pennsylvania consumers buying electricity from PECO Energy at 56 cents per kilowatt hour could save 25 percent by paying 41 cents to NewPower under a six-month contract. Over a year, consumers would save an average of $192.

The savings vary between states. Some energy producers, such as in San Diego, have become good at holding on to their power until demand reaches high levels, when it can be sold for exorbitant prices.

(Updated October 1, 2000)


a) Draw a monopoly diagram of the market for power in Pennsylvania when PECO Energy dominated the market. Include the demand and marginal revenue curves and the average total and marginal cost curves. Mark PECO Energy's equilibrium price and output.
b) Why were consumers hurt by PECO Energy's monopoly? Refer to the price, output, consumer surplus and deadweight loss. Illustrate on your diagram.

2. After deregulation, new suppliers entered the market.
a) Explain how they were able to charge a lower price and yet still be in equilibrium. Refer to their cost curves and the profit-maximizing rule.
b) As deregulation continues, the energy industry should become more akin to perfect competition. How will consumers fare then? Use the same criteria as in Question 1 (b), and illustrate on a new diagram of the industry, using the same types of curves as before.

3. How would you account for differences between states in the extent to which consumers could save money by shopping around for gas and electricity? Bear in mind your responses to Questions 1 and 2.

Source Dina Temple-Raston, "Want to save on your energy bills? Check the Net," USA Today, September 1, 2000.

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