In this chapter, we present the most important market forms that are relevant for understanding the functioning of energy markets and energy-related markets. This presentation is introduced by a deep discussion on the concepts of economies of scale and density, that are relevant to understand these market forms. We then discuss the following market forms: monopoly, perfect competition, monopolistic competition, and oligopoly. The presentation of these market forms is also integrated with some applications in the energy sector. For example, after presenting monopolies in a general way, we describe the natural monopoly and role regulation in the electricity and gas distribution sectors. At the end of the chapter, we discuss issues in developing countries related to the topics discussed in the chapter.

This chapter defines the economic dispatch problem and analyzes the KKT conditions that characterize the optimal solution. We then define competitive markets, aggregate variable costs, aggregate marginal costs, aggregate benefit, and aggregate marginal benefit in order to characterize price and quantity adjustment in markets. This allows us to define competitive market equilibrium and competitive price. The equivalence between competitive equilibrium and the optimal solution of the economic dispatch problem is established using KKT conditions. This equivalence is generalized to the context of more general market models with multiple products, and the generalized result is used repeatedly throughout the textbook for establishing the equivalence between market models and centralized optimization problems, which is the cornerstone of the argued efficiency of competitive markets.

Elasticity of demand is introduced and it is shown how this characterises how revenue will change upon a price increase (the two distinct possibilities being represented by elastic and inelastic demand). Profit maximisation is considered in general, and it is shown that, when maximising profit, marginal revenue and marginal cost must be equal. Two very different cases are then studied: that in which the firm is a monopoly and that of perfect competition.

This chapter studies the case of a small efficient firm in a perfectly competitive market. Breakeven and startup points are defined. Relationships between marginal cost, average cost and average variable cost at breakeven and startup points are investigated, and it is shown how to derive the supply set of such firms.

The traditional economic model implies that ownership is irrelevant for resource allocation. This result is known as the Coase Theorem. The Coase Theorem is just an idea, not a reality. Its importance comes from understanding its logic. It relies on the assumption of zero transaction costs. When this assumption is violated, then the way ownership is organized matters. Hence, a theory of ownership, or a theory of the allocation of property rights, must be based on models of positive transaction costs.

This topic examines the nature of market structure, its characteristics and implications for managerial strategy and industrial structure, conduct and performance. The starting point is a discussion of markets and the characteristics that are relevant in terms of determining structure and strategy, in particular pricing. These characteristics relate to number of sellers, type of product, barriers to entry, pricing power and the importance of non-price competition. The four main types of structure, perfect competition, monopoly, monopolistic competition and oligopoly, are described in terms of these characteristics, and in each case both a graphical and algebraic analysis of the equilibrium is presented for both short-run and long-run situations. The different types of structure are compared in terms of price, output, profit, efficiency and welfare. The relationships between structure, conduct and performance are discussed in the light of recent empirical studies, along with some implications for government policy which are examined further in Chapter 14. Case studies illustrate the application of theoretical concepts in practice, particularly in the presence of Covid-19.

Market structure is the type of overall market we see in different situations. A theoretical starting point in economics is the idea of the perfectly competitive market in which the market itself sets the price, there are uniform goods, and there is mobility of resources. In many markets, there are concentrations of power and there is complexity. We study in depth the price-fixing scandal that unfolded between Christie’s and Sotheby’s auction houses in the 1990s, owing to the duopolistic market structure between the two firms. Substantial litigation ensued with fines and penalties around $512 million. We consider US tests for market concentration and monopolistic power.