Question

1. How does demand affect the ability of a genco to exercise unilateral market power?

2. How does transmission congestion affect the ability of a genco to exercise unilateral market power?

Answer 1

Ans 1) Genco means power generation company. There main business activity is generation of electricity.Unilateral market power is the ability of a firm to increase the price above marginal cost.This is a case where the firm or group of firms has the power to influence the price as this can be in case of monopoly or oligopoly where a single firm or a cartel in case of monopoly ond oligopoly respectively are the price maker.Since the business of generating electricity is a bit complex and required a very different management ability as well as a huge investment is required ,and there are other legal complexities to follow along with greater risk element hence the number of corporations are limited.The demand for electricity is huge and evergrowing as human life is based on this kind of energy.This create a situation of unilateral market power where keeping in mind the demand elasticity, the firm increases the price and curb the supply so as to reduce cost and earn higher share of profits.Since the demand for electricity is elastic hence , if the price increases the demand of consumers will reduce as according to law of demand , hence to counter that the firm reduces the supply but this reduction in supply will results in the deadweight loss as result of reduction in producer and consumer surplus , on the other hand if the price elasticity of demand increases the market power will become zero.

Ans 2.) Transmission congestion is a situation that arises when there is a restriction in the economic dispatch of electricity here economic dispatch is basically a term for efficiency and minimum cost in the transmission of electricity this is a item of loss as it decreases the revenue and increases the cost .Since transmission congestion is a factor of concern hence the company that reduces such kind of losses will have edge over its competitors .And can have unilateral market power that is a case as discussed to influence the price and by reducing the marginal cost which is the cost of producing additional unit of electricity .Hence through technological advancement loss in transmission an overhead can become an advantage to create unilateral market power or a price maker.