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Why Applicants Should Use Computer Stimulation Models to Comply With the FERC's New Merger Policy

Fortnightly Magazine - February 1 1997

market relevant to customers at node A unless that generator passes the delivered price test (em that is, unless it can deliver energy to node A at a variable cost of $21/MWh or less.

*Those not familiar with antitrust analysis may misinterpret the term "small but significant and non-transitory," as used to describe a price increase of 5 percent. That term does not imply that the antitrust agencies will not challenge a merger that would lead to an anticompetitive price increase of less than 5 percent. To the contrary, Section 1.0 of the Horizontal Merger Guidelines states that "The 'small but significant and non-transitory' increase in price is employed solely as a methodological tool for the analysis of mergers: it is not a tolerance level for price increases."

1"Market power" denotes the ability of one or more firms profitably to raise prices above competitive levels for a significant period of time. 2See also, G. Werden, "Identifying Market Power in Electric Generation," PUBLIC UTILITIES FORTNIGHTLY, Feb. 15, 1996, p. 19. 3Noncooperating oligopolists exercise market power simultaneously without an agreement. Rather, each supplier maximizes its own profits based on an assumption about how other suppliers will behave. For example, in the Cournot model, each supplier assumes that other suppliers will not change their outputs in response to the output chosen by the first supplier. Each supplier then takes into account the effect of its own output on the market price and chooses the output that maximizes its own profits. 4Unlike noncooperating oligopolists, colluding suppliers reach, monitor and enforcement an agreement, although this may be done tacitly without explicit communication or side payments.

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