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Strategic Behavior and International Benchmarking for Monopoly Price Regulation: The Case of Mexico

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  • Dagobert L. Brito
  • Juan Rosellón

Abstract

This paper looks into various models that address strategic behavior in the supply of gas by the Mexican monopoly Pemex. The paper has three very strong technical results. First, the netback pricing rule for the price of domestic natural gas (based on a Houston benchmark price) leads to discontinuities in Pemex's revenue function. Second, having Pemex pay for the gas it uses and the gas it flares increases the value of the Lagrange multiplier associated with the gas processing constraint. Third, if the gas processing constraint is binding, having Pemex pay for the gas it uses and flares does not change the short run optimal solution for the optimization problem, so it will have no impact on short-run behavior. These results imply three clear policy recommendations. The first is that the arbitrage point be fixed by the amount of gas Pemex has the potential to supply in the absence of processing and gathering constraints. The second is that Pemex be charged for the gas it uses in production and the gas it flares. The third is that investment in gas processing and pipeline should be in a separate account from other Pemex investment.

Suggested Citation

  • Dagobert L. Brito & Juan Rosellón, 2010. "Strategic Behavior and International Benchmarking for Monopoly Price Regulation: The Case of Mexico," Discussion Papers of DIW Berlin 1034, DIW Berlin, German Institute for Economic Research.
  • Handle: RePEc:diw:diwwpp:dp1034
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    File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.358547.de/dp1034.pdf
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    References listed on IDEAS

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    1. Olaf J. de Groot & Matthew D. Rablen & Anja Shortland, 2011. "Gov-aargh-nance - "even criminals need law and order"," CEDI Discussion Paper Series 11-01, Centre for Economic Development and Institutions(CEDI), Brunel University.
    2. Anja Shortland, 2010. "The Business of Piracy in Somalia," Weekly Report, DIW Berlin, German Institute for Economic Research, vol. 6(23), pages 182-186.
    3. Anja Shortland, 2011. ""Robin Hook": The Developmental Effects of Somali Piracy," CEDI Discussion Paper Series 11-07, Centre for Economic Development and Institutions(CEDI), Brunel University.
    4. Shortland, Anja & Vothknecht, Marc, 2011. "Combating “maritime terrorism” off the coast of Somalia," European Journal of Political Economy, Elsevier, vol. 27(S1), pages 133-151.
    5. Stig Jarle Hansen & Mark Bradbury, 2007. "Somaliland: A New Democracy in the Horn of Africa?," Review of African Political Economy, Taylor & Francis Journals, vol. 34(113), pages 461-476, September.
    6. Leeson, Peter T., 2007. "Better off stateless: Somalia before and after government collapse," Journal of Comparative Economics, Elsevier, vol. 35(4), pages 689-710, December.
    7. Varese, Federico, 2001. "The Russian Mafia: Private Protection in a New Market Economy," OUP Catalogue, Oxford University Press, number 9780198297369.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Natural gas; strategic pricing; benchmark regulation; gas pipelines; Mexico;

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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