The New Rivalry in Infrastructure

Abstract

Chapter 1 explains the basic economic models that economists use to analyze utility markets. These models focus on how customer preferences, customer income, firm costs, and in-market strategic interactions constrain the choices firms make and determine the effects of firms’ choices. Chapter 1 concludes by illustrating that all of these models, with the primary exception of the Hotelling circle model, exclude strategic interactions outside the markets of the firm of interest. This exclusion affects the usefulness of these models for today’s utility markets because, as this chapter illustrates, today’s utilities operate in diverse markets and often face different sets of actual and potential rivals in each market. These diverse patterns of actual and potential rivalry, which I identify as multilateral rivalry or MLR in Chapter 1, affect firms’ choices of markets, products, quality, and prices. As I explain in Chapters 3–6, the effects on economic models are particularly pronounced in competition for the market, where policy makers have applied contestable market theory.