Take or Pay Contracts and Market Segmentation

Scarpa, Carlo and Polo, Michele (2007): Take or Pay Contracts and Market Segmentation. Published in: IEFE Working Paper Series , Vol. IEFE W, No. ISSN 1973-0381 (2007)

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Entry, Segmentation, Decentralized market
• Subjects: L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L11 - Production, Pricing, and Market Structure ; Size Distribution of Firms; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets; L - Industrial Organization > L9 - Industry Studies: Transportation and Utilities > L95 - Gas Utilities ; Pipelines ; Water Utilities