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Entry Without Competition

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  • Michele Polo
  • Carlo Scarpa

Abstract

This paper examines competition in a liberalized market, with reference to some key features of the natural gas industry. Each firm has a low (zero) marginal cost core capacity, due to long term contracts with take or pay obligations, and additional capacity at higher marginal costs. The market is decentralized and the firms decide which customers to serve, competing then in prices. We show that under both sequential and simultaneous entry, there is a strong incentive to segment the market: when take-or-pay obligations are still to be covered, entering and competing for the same customers implies low margins. If instead a firm is left as a monopolist on a fraction of the market, exhausting its obligation, it has no further incentive to enter a second market, where the rival will be monopolist as well. Hence, we obtain entry without competition. Antitrust ceilings do not prevent such an outcome while a wholesale pool market induces generalized competition and low margins in the retail segment.

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Bibliographic Info

Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 245.

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Date of creation: 2003
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Handle: RePEc:igi:igierp:245

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References

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  1. Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-77, November.
  2. Michele Polo & Carlo Scarpa, 2003. "The liberalization of energy markets in Europe and Italy," Working Papers 230, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  3. Green, Richard & Newbery, David M G, 1991. "Competition in the British Electricity Spot Market," CEPR Discussion Papers 557, C.E.P.R. Discussion Papers.
  4. Dasgupta, Partha & Maskin, Eric, 1986. "The Existence of Equilibrium in Discontinuous Economic Games, I: Theory," Review of Economic Studies, Wiley Blackwell, vol. 53(1), pages 1-26, January.
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Cited by:
  1. Casarin, Roberto & Trecroci, Carmine, 2006. "Business Cycle and Stock Market Volatility: A Particle Filter Approach," Economics Papers from University Paris Dauphine 123456789/6830, Paris Dauphine University.
  2. Dorigoni, Susanna & Graziano, Clara & Pontoni, Federico, 2010. "Can LNG increase competitiveness in the natural gas market?," Energy Policy, Elsevier, vol. 38(12), pages 7653-7664, December.
  3. Scarpa, Carlo & Polo, Michele, 2007. "Take or Pay Contracts and Market Segmentation," MPRA Paper 5861, University Library of Munich, Germany.

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