Game Theory and the European
Natural Gas Market
Created
by David Hillburg, Alex Lombardia, Harianto Tarigan, Tsepho Falatsa, Tyler
Hodge, N. Serhat Altun, Kehinde Ogunsekan, Damdinjav Munkhbold, Katz, Michael , Harvey S.
Rosen. Microeconomics (2nd
edition). Burr Ridge, IL: Irwin Publishing 1994. Page 542.
Click on True or False to test your knowledge
of the chapter.
1. True False. From 1953-1999, there was a growing European dependence
on natural gas.
2. True False. From 1953-1999, coal use in Europe increased.
3. True False. The evolution of the European natural gas industry
since the end of WW II shows an increasingly interconnected market with a high
degree of government participation.
4. True False. Town gas is a form of natural gas produced locally
and delivered without a long distance pipeline system
5. True False. In Europe, town gas was increasingly replaced with
less expensive natural gas in the 60s
6. True False. Most European countries produce enough natural gas
for their own needs.
7. True False. The European Economic Community (EEC) and the
European Union (EU) can be used alternatively to describe an alliance of
European Nations.
8. True False. In the last two decades European energy policy
focused on three main issues:
oil production in the North Sea, imports from middle East, and energy price caps.
9. True False. The European Energy Charter Treaty supports energy
reform, encourages technology transfers and promotes environmental goals in former
Eastern Bloc countries.
10. True False. From 1973-1983, the use of oil decreased in
Europe.
11. True False. The Troll field is a major gas field located in
the North Sea.
12. True False. Zeebrugge is a major gas field in Russia,
discovered in the mid 90s.
13. True False. The Urengoi gas field in Russia along with eight
other gas fields are connected to Europe’s gas markets.
14. True False. Russia has huge gas reserves, equivalent to an 80 years
supply of gas at the 1999 rate of production.
15. True False. Small firms dominate the European energy markets.
16. True False. The Cournot model is solved just like a monopoly.
17. True False. A backstop technology is one, which is currently
available at a reasonable price.
18. True False. The Stackelberg model is similar to a dominant
firm model.
19. True False. Price and total profit in a competitive model is
higher than in a Cournot duopoly model.
20. True False. . In a competitive market, the short run supply
curve equals the horizontal sum of the marginal cost curves while in a Cournot
duopoly model, the duopolists face the same demand and cost functions and they
choose the price to maximize profit
21. True False. Suppose that Norway (country 1) and Russia
(country 2) are the only two gas exporters to Germany. The inverse demand function in this market
is P = 140 - 0.7(q1 + q2). Where P is price and q1
and q2 are the outputs for firms 1 and 2, respectively. C1 = 8q1 and C2
= 1.8q. Where C1 and C2 are the
total costs for firms 1 and 2. Then using the Stackleberg (price leader) model,
the quantities are q1 = 93.33, q2 = 26.67 and the price
is, p = 40.
22. True False. In the Stackleberg model, the leader firm chooses
its own output level based on how other firms will react, while the follower
firm chooses their optimal output based on what the leader produces. In the dominant firm model one firm or the
dominant firm is the price setter and the smaller, fringe firms, are price
takers.
23. True False. Assume the demand in a market is P =
1,000 – Sqi where i varies depending on the number of firms in the Cournot
market and assume that each firm has the same total cost function equal to 100qi. The equilibrium price with three firms is
lower than it is for two firms.
24. True False. The equilibrium price in a Bertrand duopoly is
higher than the equilibrium price in a perfectly competitive market.
25.
True False. Suppose Firm 1 and
Firm 2 are duopolists for a given market.
The inverse demand function is P = 200 - 2(Q1+Q2),
where P is price and Q1 and Q2 are the outputs for Firm 1
and Firm 2, respectively. Cost
functions for the firms are, C1 = 6Q12 and C2
= 5Q2+10. In this market, price equals to 95.66 and profit ratio of
the two firms (p2/p1)
is 11.
26. True
False. Suppose the average total
cost function for a backstop (solar energy) technology for Q < 20 is AC =
100/Q, whereas for Q > 20, AC = 5. Demand for the energy market is Q = 60 -
2P and marginal cost function for the monopolist is MC = 0.8Q. Considering the limit pricing model, profit
would be $438 for the monopolist under a threat of possible backstop entry.
27. True
False. In a bilateral monopoly,
the reservation price of the supplier results in zero producer surplus.
28. True False. We expect that price in a bilateral monopoly would
be between the reservation price of the buyer and the supplier.
29. True False. A perfectly price discriminating monopolist would
produce the same amount as would be
produced in a competitive market and there will no dead-weight loss from the
monopoly power, because the marginal revenue and demand curves of the perfectly
price discriminating monopolist are identical.
30. True False. . A perfectly price discriminating
monopolist faces a demand curve of P = 50 – 0.25Q and a marginal cost of MC =
2.5Q. The profit maximizing quantity =
18.18 and price = $45.45, and the profit of the monopolist = 454.56.
31. True
False. As fossil fuels are depleted, we expect to move on
to lower cost renewable fuels.