ABC has always been a publicly owned company and it has long had a successful patent on electricity generation and transmission. It has now been abolished with the division of the company in two and electricity transmission is now at DEF, but electricity production remained at Landsvirkjun. This example is about ABC and now competition is allowed in electricity production.
ABC is in a very dominant position in this new competition, but other small parties have emerged in electricity production. To begin with, ABC had rising marginal costs and so did the small parties. The small parties had the same marginal cost. ABC's marginal cost was higher than that of the small parties, but ABC's dominant position enabled it to determine the price, and the small parties then reacted to that price and their reaction was shaped by the fact that ABC determined the price of electricity.
1. Show price formation in the above market. Where you describe how the parties behave in electricity production. Explain the demand that shapes ABC's decision and how it takes into account small stakeholders in electricity generation.
ABC's Operations Advisor is now dealing with its CEO and proposing the following:
ABC should streamline and adjust its marginal costs so that they are fixed and lower than those of small parties. The small parties now also have a fixed and similar marginal cost, says the consultant. Show the picture of ABC's most efficient pricing in these circumstances if they succeed, and at the same time show the demand it is currently facing.