Industry Pattern Describe the Industry and Explain

Industry Pattern

Describe the industry and explain the general pattern of change of the particular market model.

Since the 1990s, the electric utility industry has been going through tremendous amounts of deregulation. This is because the monopolistic model made them ineffective in delivering different services. When this happened, consumers began to experience dramatic increases in the costs for their utility bills. In general, this was considered to be a naturalistic monopoly, as the government regulatory agencies could protect the interests of consumers. However, after it became clear that this approach was ineffective, is when there was a transformation in these strategies. This occurred with many governments around the world opening the marketplace to foreign competitors or selling their assets to private individuals / entities. (Griffin, 2005, pp. 39 -- 110)

Moreover, the increasing demand from consumers meant that this model was simply unsustainable. Evidence of the can be seen with the total amount of electric usage in the United States between 1930 and 2000 with this increasing from: 609 per capita kilowatt hours to 12,158. These changes meant that current approach could not keep up with future demand. As a result, deregulation was utilized as the primary solution for addressing these issues. (Griffin, 2005, pp. 39 -- 110)

Hypothesize the basic short-run and long-run behaviors of the model in the industry you have chosen in a "market economy."

Over the short-term, this will decrease electricity prices for consumers and it will increase the profit margins for producers. This means that different regions of the country can continue to experience consistent economic growth. Over the long-term, the investment that is made in these kinds of projects will result in the creation of more jobs for the local economy. (Griffin, 2005, pp. 39 -- 110)

At the same time, the diversification in new sources will translate into a larger number of plants operating within specific areas. When this occurs, a win -- win situation is created with: consumers receiving lower prices, they are having their needs addressed, firms are realizing increases to their profit margins and communities will benefit from the rising number of jobs / tax revenues generated. (Griffin, 2005, pp. 39 -- 110)

Analyze at least three (3) possible areas for the industry that could lead to transaction costs, and explain each in detail.

The way that transactions costs could be implemented include: through the generation, distribution and resale of electricity. In the case of generation, an increase the number of producers will lead to a larger supply available in the marketplace. This will encourage firms and investors to build the distribution network within specific regions (in order to address these challenges). (Kleit, 2007, pp. 39 -- 63)

At the same time, a number of firms will become involved in the reselling of electricity to specific areas. In the event of supply disruptions, these organizations will play an integral part in delivering a consistent supply. When this happens, customer demand is being addressed and prices will remain stable. (Kleit, 2007, pp. 39 -- 63)

Speculate about the behavior that could result from these transactions and propose at least two (2) strategies for dealing with them.

There are two possible types of behaviors that will result from the shift to this model these include: price gouging and oversupply. Price gouging is taking place through different companies realizing that a particular area needs a certain amount of electricity. However, they do not have enough capacity to keep with these changes. This means that they will inflate the prices they are charging whole sellers and consumers. At the same time, executives of these firms are interested in increasing their profit margins and exploiting these situations (without customers or regulators becoming aware of their activities). (Grossman, 2003, pp. 193 -- 215)

Oversupply will occur, when different firms are having a price war with one another. Their basic objectives are drive out competitors from the marketplace by effectively underbidding them. Then, once the total number of firms has decreased is when they will begin to engage in monopolistic tendencies. These areas are illustrating how these kinds of behaviors are possible with a switch to this type of model for the industry. (Grossman, 2003, pp. 193 -- 215)

Collect costs, revenue data, or other data from the industry that you deem relevant. Explain how you would modify the data in order to make it relevant to decisions a manager must make.

In the case of costs, deregulation has kept wholesale electricity prices in check (with 4.0% increases in prices from 2000 to 2006). This is because generation capacity has grown much higher than demand. Evidence of this can be seen in the below table (which is showing these changes from 2000 to 2006 for demand and system capacity). (Grossman, 2003, pp. 193 -- 215)

Demand vs. System Capacity from 2000 to 2006

Category

Percentage Increase

Generating Capacity

25%

Demand

5.0%

(Grossman, 2003, pp. 193 -- 215)

These figures are illustrating how deregulation has resulted in an increase in production capacity that is much larger than what was required from customers. As a result, one could argue that this increase is what helped to keep prices down.