Gas market area mergers: when is bigger better?

European governments introduced gas market areas with entry–exit tariffs because of the perceived benefits of opening the European gas market to competition. In practice, gas market areas abstract from the underlying physical realities of the network and do not signal the locational value of gas, which introduces a competitive distortion. This paper examines the welfare effects of expanding gas market areas and the circumstances in which a larger gas market area increases or reduces economic welfare. In general, more mature market areas that already rank highly in terms of competitiveness and liquidity stand to gain little from market area mergers, unlike less mature market areas, particularly when merging with a more mature market area. However, this paper argues that merged market areas enjoy greater market power and could therefore allow more efficient Ramsey–Boiteux transport pricing in the face of decarbonization and associated stranding risks for gas assets. Current European regulation does not seem to allow these pricing principles to be applied, but they would potentially offer important gains for transmission system operators and end users alike, and they might justify further market mergers where other benefits appear illusory.