IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/5861.html
   My bibliography  Save this paper

Take or Pay Contracts and Market Segmentation

Author

Listed:
  • 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.

Suggested Citation

  • Scarpa, Carlo & Polo, Michele, 2007. "Take or Pay Contracts and Market Segmentation," MPRA Paper 5861, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:5861
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/5861/1/MPRA_paper_5861.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Dixit, Avinash, 1980. "The Role of Investment in Entry-Deterrence," Economic Journal, Royal Economic Society, vol. 90(357), pages 95-106, March.
    2. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
    3. Vives, Xavier, 1986. "Commitment, flexibility and market outcomes," International Journal of Industrial Organization, Elsevier, vol. 4(2), pages 217-229, June.
    4. 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, vol. 75(5), pages 1083-1093, December.
    5. Hubbard, R Glenn & Weiner, Robert J, 1986. "Regulation and Long-term Contracting in U.S. Natural Gas Markets," Journal of Industrial Economics, Wiley Blackwell, vol. 35(1), pages 71-79, September.
    6. Marc Dudey, 1992. "Dynamic Edgeworth-Bertrand Competition," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(4), pages 1461-1477.
    7. Green, Richard J & Newbery, David M, 1992. "Competition in the British Electricity Spot Market," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 929-953, October.
    8. Michele Polo & Carlo Scarpa, 2003. "Entry Without Competition," Working Papers 245, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    9. repec:dau:papers:123456789/5372 is not listed on IDEAS
    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. Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-1277, November.
    12. Maggi, Giovanni, 1996. "Strategic Trade Policies with Endogenous Mode of Competition," American Economic Review, American Economic Association, vol. 86(1), pages 237-258, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bonacina, Monica & Cret, Anna & Sileo, Antonio, 2009. "Gas storage services and regulation in Italy: A Delphi analysis," Energy Policy, Elsevier, vol. 37(4), pages 1277-1288, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Polo, Michele & Scarpa, Carlo, 2013. "Liberalizing the gas industry: Take-or-pay contracts, retail competition and wholesale trade," International Journal of Industrial Organization, Elsevier, vol. 31(1), pages 64-82.
    2. Moreno, Diego & Ubeda, Luis, 2006. "Capacity precommitment and price competition yield the Cournot outcome," Games and Economic Behavior, Elsevier, vol. 56(2), pages 323-332, August.
    3. Michele Polo & Carlo Scarpa, 2003. "Entry Without Competition," Working Papers 245, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    4. Perrels, Adriaan & Honkatukia, Juha & Mälkönen, Ville, 2006. "Impacts of the European Emission Trade System on Finnish Wholesale Electricity Prices," Discussion Papers 405, VATT Institute for Economic Research.
    5. Flavio M. Menezes & John Quiggin, 2023. "Competition in supply functions and conjectural variations: a unified solution," Australian Institute for Business and Economics DP012023, School of Economics, University of Queensland, Australia.
    6. Maria Kopsakangas-Savolainen, 2003. "Quantity versus Price Competition in the Deregulated Finnish Electricity Markets," Finnish Economic Papers, Finnish Economic Association, vol. 16(2), pages 51-60, Autumn.
    7. Yunus Emre Gürler & Sinan Ertemel & Matthias Finger & Muzaffer Eroğlu, 2024. "Legal and ownership unbundling in the Turkish natural gas market: A comparative analysis," Competition and Regulation in Network Industries, , vol. 25(1), pages 19-42, March.
    8. Xavier Vives, 2011. "Strategic Supply Function Competition With Private Information," Econometrica, Econometric Society, vol. 79(6), pages 1919-1966, November.
    9. repec:dau:papers:123456789/5372 is not listed on IDEAS
    10. Debora Di Gioacchino, 2008. "Strategic technology choice in regulated markets with demand uncertainty," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 35(2), pages 145-164, April.
    11. Newbery, David M. & Greve, Thomas, 2017. "The strategic robustness of oligopoly electricity market models," Energy Economics, Elsevier, vol. 68(C), pages 124-132.
    12. Moritz Bohland & Sebastian Schwenen, 2020. "Technology Policy and Market Structure: Evidence from the Power Sector," Discussion Papers of DIW Berlin 1856, DIW Berlin, German Institute for Economic Research.
    13. Fabra, Natalia & Toro, Juan, 2005. "Price wars and collusion in the Spanish electricity market," International Journal of Industrial Organization, Elsevier, vol. 23(3-4), pages 155-181, April.
    14. Fiuza de Bragança, Gabriel Godofredo & Daglish, Toby, 2016. "Can market power in the electricity spot market translate into market power in the hedge market?," Energy Economics, Elsevier, vol. 58(C), pages 11-26.
    15. Bonacina, Monica & Gulli`, Francesco, 2007. "Electricity pricing under "carbon emissions trading": A dominant firm with competitive fringe model," Energy Policy, Elsevier, vol. 35(8), pages 4200-4220, August.
    16. Lu, Yuanzhu & Poddar, Sougata, 2005. "Mixed oligopoly and the choice of capacity," Research in Economics, Elsevier, vol. 59(4), pages 365-374, December.
    17. Maria José Gil-Moltó & Claudio A. Piga, 2007. "Entry and Exit in a Liberalised Market," Rivista di Politica Economica, SIPI Spa, vol. 97(1), pages 3-38, January-F.
    18. Luciano Fanti & Nicola Meccheri, 2017. "Unionization Regimes, Capacity Choice by Firms and Welfare Outcomes," Manchester School, University of Manchester, vol. 85(6), pages 661-681, December.
    19. Pio Baake & Sebastian Schwenen & Christian von Hirschhausen, 2020. "Local Power Markets," Discussion Papers of DIW Berlin 1904, DIW Berlin, German Institute for Economic Research.
    20. Holmberg, Pär & Newbery, David & Ralph, Daniel, 2013. "Supply function equilibria: Step functions and continuous representations," Journal of Economic Theory, Elsevier, vol. 148(4), pages 1509-1551.
    21. Holmberg, Pär & Willems, Bert, 2015. "Relaxing competition through speculation: Committing to a negative supply slope," Journal of Economic Theory, Elsevier, vol. 159(PA), pages 236-266.

    More about this item

    Keywords

    Entry; Segmentation; Decentralized market;
    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:5861. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.