Question

Singapore Power (SP) is the only operator in the domestic electricity market in Singapore.
Electricity distribution generally is associated with extremely high economies of scale
because of the infrastructure (a nationwide power grid) needed to deliver power to individual
households. Using the theory and models of market structure, examine this firm. Should
government be worried about any aspect of how a firm under this market structure will
perform? What should government do to address such worries?

Answer 1

Singapore Power is a government owned company which seeks to provide electricity to all parts of the country. Being the only supplier in the power distribution of a country. Further, it operates on an economy of scale model meaning that it aims to make its profitability through the quantity of electricity provided rather than the per user profit which it may earn otherwise.

The economic theory around this is simple, such monopolies run on market share capitalization and are not concerned over per user profits but profits as a whole is what matters to them the most.

Further, the cost of operations and barriers to entry are so high because of the initial investments required, that no other firm is able to compete with them in the current market situation.

Further, in my opinion, the government should indeed be worried about the functioning of this market structure. The core reason behind that is the fact that firstly this is a government owned company and any profit or loss has to be dealt with by the government only.

Secondly, the power sector has a high impact on the overall GDP and growth in the economy as it serves as the back bone. Further monopolies as a market structure become too complacent due to the fact that there aren’t any competitors in the market place. Therefore, they may start to be unproductive and non-profit making which can lead to long term problems of sustainability for such an important organization.

Therefore, monitoring the governance and pricing for such companies in a monopoly where in only one company exists and has dominance plus the fact that this company is government owned leads us to conclude that government indeed should be worried and actively involved in managing the market in such companies.

Please feel free to ask your doubts in the comments section.