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Efficient Contracting and Market Power: Evidence from the U.S. Natural Gas Industry

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  • R. Glenn Hubbard
  • Robert J. Weiner

Abstract

It is well recognized by economists that long-term contracting under an array of price and non-price provisions may be an efficient response to small-numbers bargaining problems. Empirical work to distinguish such issues from predictions of models of market power and bargaining has been sparse, principally because the necessary data on individual transactions are seldom publicly available. The U.S. natural gas industry is well suited for such tests both because of the small number of buyers (pipelines) and sellers (producers) in each market and the large capital commitments required of transacting parties at the inning of the contract. We present a model of the bilateral bargaining process is natural gas field markets under uncertainty. We identify the 'initial price' as the outcome of the bargaining aver a fixed payment for pipeline to producer, and describe "price-escalator provisions" as a means of making the contract responsive at the margin to changes in the valuation of gas over the term of the agreement. Our econometric work rakes use of a large, detailed data set on during the l950s. Empirical evidence from models of price determination and the use of most-favored-nation clauses is supportive of the theoretical model.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3502.

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Date of creation: Nov 1990
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Publication status: published as Journal of Law and Economics, Vol.34, No.1, pp.25-67, April 1991.
Handle: RePEc:nbr:nberwo:3502

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Cited by:
  1. Josh Lerner & Robert P. Merges, 1997. "The Control of Strategic Alliances: An Empirical Analysis of Biotechnology Collaborations," NBER Working Papers 6014, National Bureau of Economic Research, Inc.
  2. Hartman, Raymond S. & Tabors, Richard D., 1998. "Optimal operating arrangements in the restructured world: economic issues," Energy Policy, Elsevier, vol. 26(2), pages 75-83, February.
  3. Chakravorty, Ujjayant & Leach, Andrew & Moreaux, Michel, 2010. "Would Hotelling Kill the Electric Car?," IDEI Working Papers 602, Institut d'Économie Industrielle (IDEI), Toulouse.
  4. Glachant, Jean-Michel & Hallack, Michelle, 2009. "Take-or-pay contract robustness: A three step story told by the Brazil-Bolivia gas case?," Energy Policy, Elsevier, vol. 37(2), pages 651-657, February.
  5. Cetin, Tamer & Oguz, Fuat, 2007. "The politics of regulation in the Turkish electricity market," Energy Policy, Elsevier, vol. 35(3), pages 1761-1770, March.
  6. Constanza Fosco Perea Muñoz & Eduardo Saavedra, . "Mercados de Gas Natual: Análisis Comparado de la Experiencia Internacional," ILADES-Georgetown University Working Papers inv150, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.
  7. Pierre-André Chiappori & Bernard Salanié, 2002. "Testing Contract Theory : A Survey of Some Recent Work," Working Papers 2002-11, Centre de Recherche en Economie et Statistique.
  8. Michelle Hallack & Miguel Vazquez, 2012. "The impact of who decides the rules for network use: A 'common pool' analysis of the investment dynamics in different gas network regulatory frames," RSCAS Working Papers 2012/52, European University Institute.
  9. Sen Wang & Tim Bogle & G. Cornelis van Kooten, 2012. "Forestry and the New Institutional Economics," Working Papers 2012-05, University of Victoria, Department of Economics, Resource Economics and Policy Analysis Research Group.
  10. Chuanlong Tang & Sumner J. La Croix, 1993. "The Role of Transaction-Specific Capital and Market Structure in Contracting: Evidence from Japan's Overseas Coking Coal Procurement," Working Papers 199314, University of Hawaii at Manoa, Department of Economics.
  11. De Vany, Arthur & Walls, W. David, 1993. "Network Connectivity and Price Convergency: Gas Pipeline Deregulation," University of California Transportation Center, Working Papers qt9n876133, University of California Transportation Center.
  12. Arora, Vipin, 2012. "A Note on Natural Gas Market Evolution in Light of Transaction Cost Theory," MPRA Paper 54974, University Library of Munich, Germany.
  13. Cédric Clastres & Catherine Locatelli, 2012. "European Union energy security: the challenges of liberalisation in a risk-prone international environment Society," Post-Print halshs-00787123, HAL.
  14. Catherine Locatelli, 2012. "Relations UE-Russie : les enjeux d'une nouvelle architecture gazière," Post-Print halshs-00755640, HAL.
  15. Costello, Anna M., 2013. "Mitigating incentive conflicts in inter-firm relationships: Evidence from long-term supply contracts," Journal of Accounting and Economics, Elsevier, vol. 56(1), pages 19-39.

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