Market Structures: Competition and Monopoly: Question 10

Worked solution

Part (a): Why a second grid could be wasteful

GridCore’s existing network of pylons and cables already carries electricity to every town in Larkspur. Building a second, complete network alongside it would largely duplicate infrastructure that already does the job, using several billion dollars’ worth of materials, labour and land, resources that could instead be used elsewhere in Larkspur’s economy, for very little extra benefit, since almost every household is already connected to GridCore’s grid.

Part (b): Why no rival has entered

Two separate barriers discourage a rival from building a competing grid:

• The cost of building a whole second network, several billion dollars, is far beyond what most firms could afford to invest.
• The practical disruption of digging up roads and fields across the entire country a second time makes the project highly impractical, further discouraging any rival from attempting it, even one with enough money.

Part (c): Disadvantage for households

Because no rival grid operator exists, households in Larkspur cannot switch supplier if GridCore’s connection fee rises. There is no competitive pressure keeping the fee in check. This matches the scenario’s own evidence: GridCore’s fee has risen from $60 to $85 over ten years,

$\frac{85-60}{60}\times100 \approx 41.7$

an increase of about 41.7%, without any government challenge. With no alternative grid to turn to, households simply have to pay whatever fee GridCore sets.

Part (d): Discussion, a second grid, or a single operator?

Case for a second grid: A rival grid could put competitive pressure on GridCore’s connection fee, which has already risen by almost 42% in ten years unchecked, and give households an alternative if service quality ever fell.

Case against a second grid: Building a whole second network would waste several billion dollars duplicating pylons and cables that largely already exist, and both networks would then need to recover their own huge construction costs from households’ fees, potentially raising the total cost households pay even with two firms competing.

Case for a single operator (GridCore): Avoiding a duplicate network keeps Larkspur’s overall infrastructure cost lower, since only one set of pylons and cables needs to be built and maintained across the country.

Case against a single operator: With no rival grid to discipline it, GridCore faces little pressure to hold its fee down, as shown by the rise from $60 to $85 over the past ten years.

Conclusion: Because a literal duplicate grid would waste enormous resources without necessarily lowering the total cost households ultimately pay, Larkspur is more likely to be better served by continuing to rely on a single grid operator such as GridCore, provided some mechanism exists to stop its connection fee rising unchecked, rather than duplicating the entire physical network merely to create competition.

Final answers

• (a) A second grid would largely duplicate infrastructure that already reaches every town, wasting resources.
• (b) The several-billion-dollar construction cost and the impracticality of digging up roads and fields a second time.
• (c) With no rival to switch to, households cannot avoid GridCore’s fee rises, e.g. $60 to $85, about 41.7%, over ten years.
• (d) On balance, Larkspur is more likely to be better served by a single, regulated grid operator than by wastefully duplicating the network to create competition.