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Market Liberalization in the European Natural Gas Market - The Importance of Capacity Constraints and Efficiency Differences

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  • Steven Brakman
  • Charles van Marrewijk
  • Arjen van Witteloostuijn

Abstract

In the European Union, energy markets are increasingly being liberalized. A case in point is the European natural gas industry. The general expectation is that more competition will lead to lower prices and higher volumes, and hence higher welfare. This paper indicates that this might not happen for at least two reasons. First, energy markets, including the market for natural gas, are characterized by imperfect competition and increasing costs to develop new energy sources. As a result, new entrants in the market are less efficient than incumbent firms. Second, energy markets, again including the market for natural gas, are associated with capacity constraints. Prices are determined in residual markets where the least efficient firms are active. This is likely to lead to price increases, rather than decreases.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2697.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2697

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  1. Ruud Egging & Steven A. Gabriel & Franziska Holz & Jifang Zhuang, 2007. "A Complementarity Model for the European Natural Gas Market," Discussion Papers of DIW Berlin 732, DIW Berlin, German Institute for Economic Research.
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  7. Castro-Rodriguez, Fidel & Marín, Pedro L. & Siotis, Georges, 2009. "Capacity choices in liberalised electricity markets," Energy Policy, Elsevier, Elsevier, vol. 37(7), pages 2574-2581, July.
  8. van Witteloostuijn, Arjen & Brakman, Steven & van Marrewijk, Charles, 2007. "Welfare distribution effect of a price reduction in the Dutch gas transport market: A scenario analysis of regulatory policy, market form and rent allocation," Energy Policy, Elsevier, Elsevier, vol. 35(12), pages 6299-6308, December.
  9. David M. Kreps & Jose A. Scheinkman, 1983. "Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 14(2), pages 326-337, Autumn.
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  11. Lochner, Stefan & Bothe, David, 2009. "The development of natural gas supply costs to Europe, the United States and Japan in a globalizing gas market--Model-based analysis until 2030," Energy Policy, Elsevier, Elsevier, vol. 37(4), pages 1518-1528, April.
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  13. Ellis, Andrew & Bowitz, Einar & Roland, Kjell, 2000. "Structural change in Europe's gas markets: three scenarios for the development of the European gas market to 2020," Energy Policy, Elsevier, Elsevier, vol. 28(5), pages 297-309, May.
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Cited by:
  1. Yu-Fu Chen & Michael Funke, 2010. "Booms, Recessions And Financial Turmoil: A Fresh Look At Investment Decisions Under Cyclical Uncertainty," Scottish Journal of Political Economy, Scottish Economic Society, Scottish Economic Society, vol. 57(s1), pages 290-317, 07.
  2. Chen, Yu-Fu & Funke, Michael, 2009. "Booms, Recessions and Financial Turmoil: A Fresh Look at Investment Decisions under Cyclical Uncertainty," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2009-31, Scottish Institute for Research in Economics (SIRE).

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