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Liberalizing the Gas Industry: Take-or-Pay Contracts, Retail Competition and Wholesale Trade

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  • Michele Polo
  • Carlo Scarpa

Abstract

This paper examines retail competition in a liberalized gas market. Vertically integrated firms run both wholesale activities (buying gas from the producers under take-or-pay obligations) and retail activities (selling gas to final customers). The market is decentralized and the firms decide which customers to serve, competing then in prices. We show that TOP clauses limit the incentives to face-to-face competition and determine segmentation and monopoly pricing even when entry of new competitors occurs. The development of wholesale trade, instead, may induce generalized entry and retail competition. This equilibrium outcome is obtained if a compulsory wholesale market is introduced, even when firms are vertically integrated, or under vertical separation of wholesale and retail activites when firms can use only linear bilateral contracts.

Suggested Citation

  • Michele Polo & Carlo Scarpa, "undated". "Liberalizing the Gas Industry: Take-or-Pay Contracts, Retail Competition and Wholesale Trade," IEFE Working Papers 49, IEFE, Center for Research on Energy and Environmental Economics and Policy, Universita' Bocconi, Milano, Italy.
  • Handle: RePEc:bcu:iefewp:iefewp49
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    References listed on IDEAS

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    Cited by:

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    2. Suleman, Shafic, 2020. "Natural Gas Industry Restructuring for Value Optimisation: A Case Study of Ghana," MPRA Paper 99155, University Library of Munich, Germany.
    3. del Valle, Aurora & Dueñas, Pablo & Wogrin, Sonja & Reneses, Javier, 2017. "A fundamental analysis on the implementation and development of virtual natural gas hubs," Energy Economics, Elsevier, vol. 67(C), pages 520-532.
    4. Anne Neumann & Sophia Rüster & Christian von Hirschhausen, 2015. "Long-Term Contracts in the Natural Gas Industry: Literature Survey and Data on 426 Contracts (1965-2014)," Data Documentation 77, DIW Berlin, German Institute for Economic Research.
    5. Basaure, Arturo & Suomi, Henna & Hämmäinen, Heikki, 2016. "Transaction vs. switching costs—Comparison of three core mechanisms for mobile markets," Telecommunications Policy, Elsevier, vol. 40(6), pages 545-566.
    6. Gavin, Sebnem & Ross, Thomas W., 2018. "Long-term contracts as barriers to entry with differentiated products," International Journal of Industrial Organization, Elsevier, vol. 59(C), pages 514-537.
    7. Massimiliano Celli, 2016. "External VS. Internal Audit in the Accounting of Complex Contractual Instruments: A Survey on EU Firms," International Journal of Business and Management, Canadian Center of Science and Education, vol. 11(5), pages 1-22, April.
    8. Miriello, Caterina & Polo, Michele, 2015. "The development of gas hubs in Europe," Energy Policy, Elsevier, vol. 84(C), pages 177-190.

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    More about this item

    Keywords

    Entry; Segmentation; capacity constraints; wholesale markets.;
    All these keywords.

    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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