How can incumbent firms manipulate the electricity market?

How can incumbent firms manipulate the electricity market?

• A. By increasing the number of competitors
• B. By shutting down plants during peak demand hours
• C. By charging the same price to all consumers
• D. By diversifying their product range

Answer: (B)

Incumbent firms can manipulate the electricity market by shutting down plants during peak demand hours. When these firms anticipate high demand for electricity, if they choose to reduce supply by shutting down certain plants, it can create a scarcity in the market. This strategic reduction in supply can lead to an increase in prices, as consumers will compete for the limited available power. The ability to control supply effectively gives these firms the power to influence market prices, taking advantage of peak demand scenarios to maximize their profits. The other options do not directly lead to manipulation of market prices or supply in the same way. Increasing the number of competitors generally promotes competition, which can actually lower prices and benefit consumers rather than allow for manipulation. Charging the same price to all consumers aligns with principles of uniform pricing and does not reflect manipulation, as it may create a more equitable pricing structure rather than one benefiting the firm. Diversifying their product range may improve overall business performance, but it does not directly influence the manipulation of the electricity market in terms of pricing and supply dynamics.

Incumbent firms can manipulate the electricity market by shutting down plants during peak demand hours. When these firms anticipate high demand for electricity, if they choose to reduce supply by shutting down certain plants, it can create a scarcity in the market. This strategic reduction in supply can lead to an increase in prices, as consumers will compete for the limited available power. The ability to control supply effectively gives these firms the power to influence market prices, taking advantage of peak demand scenarios to maximize their profits.

The other options do not directly lead to manipulation of market prices or supply in the same way. Increasing the number of competitors generally promotes competition, which can actually lower prices and benefit consumers rather than allow for manipulation. Charging the same price to all consumers aligns with principles of uniform pricing and does not reflect manipulation, as it may create a more equitable pricing structure rather than one benefiting the firm. Diversifying their product range may improve overall business performance, but it does not directly influence the manipulation of the electricity market in terms of pricing and supply dynamics.