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Take or Pay Contracts and Market Segmentation

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  • Scarpa, Carlo
  • Polo, Michele

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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Bibliographic Info

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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Keywords: Entry; Segmentation; Decentralized market;

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References

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  1. Hubbard, R Glenn & Weiner, Robert J, 1986. "Regulation and Long-term Contracting in U.S. Natural Gas Markets," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 35(1), pages 71-79, September.
  2. Vives, Xavier, 1986. "Commitment, flexibility and market outcomes," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 4(2), pages 217-229, June.
  3. Green, Richard J & Newbery, David M, 1992. "Competition in the British Electricity Spot Market," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 100(5), pages 929-53, October.
  4. Dudey, Marc, 1992. "Dynamic Edgeworth-Bertrand Competition," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 107(4), pages 1461-77, November.
  5. Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, Econometric Society, vol. 57(6), pages 1243-77, November.
  6. Michele Polo & Carlo Scarpa, 2003. "Entry Without Competition," Working Papers 245, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  7. Maggi, Giovanni, 1996. "Strategic Trade Policies with Endogenous Mode of Competition," American Economic Review, American Economic Association, American Economic Association, vol. 86(1), pages 237-58, March.
  8. Creti, Anna & Villeneuve, Bertrand, 2004. "Long-term contracts and take-or-pay clauses in natural gas Markets," Economics Papers from University Paris Dauphine, Paris Dauphine University 123456789/5372, Paris Dauphine University.
  9. Dixit, Avinash, 1979. "The Role of Investment in Entry-Deterrence," The Warwick Economics Research Paper Series (TWERPS), University of Warwick, Department of Economics 140, University of Warwick, Department of Economics.
  10. 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.
  11. 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, American Economic Association, vol. 75(5), pages 1083-93, December.
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Cited by:
  1. Bonacina, Monica & Cret, Anna & Sileo, Antonio, 2009. "Gas storage services and regulation in Italy: A Delphi analysis," Energy Policy, Elsevier, Elsevier, vol. 37(4), pages 1277-1288, April.

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