Question

In the market for "home heating" consumers typically have several options (e.g., electricity, heating fuel, natural gas, propane, etc.), yet we often think of firms in this industry as behaving like monopolists. Discuss the context in which your electricity provider is a monopolist. Is this characterization universally applicable? Explain your answer.

Explain how a profit-maximizing monopolist chooses its level of output and the price of its goods.

Even when allowed to collude, firms in an oligopoly may choose to cheat on their agreements with the rest of the cartel. Why? Same thing happens in the Prisoners Dilemma.

What effect does the number of firms in an oligopoly have on the characteristics of the market?

Answer 1

although we have other substitutes for the energy supply such as fuel, natural gas, etc. but they are not the perfect substitute of the electricity and many of the home and factory appliances do not operate with the substitute available thus we need electricity even we have substitutes which make electricity industry act as monopolistic.

monopolistic set its marginal revenue equal to its marginal cost to find the optimal price and quantity.

cheating on cartel can increase the payoff of the cheater and thus he makes higher profit by capturing larger market size.

oligopoly has a small number of large firms. thus they are more competitive than monopoly and less competitive to the perfect competition. they produce quantity which is higher than the monopoly but less than perfect competition. because of such large firms, they have cut-throat competition in the market. because of monopolistic market becomes more competitive and thus benefit consumer in terms of lower prices.