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Take or Pay Contracts and Market Segmentation

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Author Info
Scarpa, Carlo
Polo, Michele

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Abstract

This paper examines competition in the liberalized natural gas market. Each .firm has 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. In equilibrium each .firm approaches a different segment of the market and sets the monopoly price, i.e. market segmentation. Antitrust ceilings do not prevent such an outcome while the separation of wholesale and retail activities and the creation of a wholesale market induces generalized competition and low margins in the retail segment.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 5861.

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Date of creation: 2007
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Handle: RePEc:pra:mprapa:5861

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Related research
Keywords: Entry Segmentation Decentralized market

Find related papers by JEL classification:
L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Masten, Scott E & Crocker, Keith J, 1985. "Efficient Adaptation in Long-term Contracts: Take-or-Pay Provisions for Natural Gas," American Economic Review, American Economic Association, vol. 75(5), pages 1083-93, December. [Downloadable!] (restricted)
  2. Carl Davidson & Raymond Deneckere, 1986. "Long-Run Competition in Capacity, Short-Run Competition in Price, and the Cournot Model," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 404-415, Autumn. [Downloadable!] (restricted)
  3. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring. [Downloadable!] (restricted)
  4. Michele Polo & Carlo Scarpa, . "The liberalization of energy markets in Europe and Italy," Working Papers 230, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
  5. Dixit, Avinash, 1980. "The Role of Investment in Entry-Deterrence," Economic Journal, Royal Economic Society, vol. 90(357), pages 95-106, March. [Downloadable!] (restricted)
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  6. Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-77, November. [Downloadable!] (restricted)
  7. Dudey, Marc, 1992. "Dynamic Edgeworth-Bertrand Competition," The Quarterly Journal of Economics, MIT Press, vol. 107(4), pages 1461-77, November. [Downloadable!] (restricted)
  8. Michele Polo & Carlo Scarpa, . "Entry Without Competition," Working Papers 245, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
  9. Maggi, Giovanni, 1996. "Strategic Trade Policies with Endogenous Mode of Competition," American Economic Review, American Economic Association, vol. 86(1), pages 237-58, March. [Downloadable!] (restricted)
  10. Green, Richard J & Newbery, David M, 1992. "Competition in the British Electricity Spot Market," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 929-53, October. [Downloadable!] (restricted)
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