Take or Pay Contracts and Market Segmentation
IEFE Working Paper No. 5
41 Pages Posted: 21 Nov 2007 Last revised: 26 Mar 2008
Date Written: July 11, 2007
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.
Keywords: entry, segmentation, decentralized market
JEL Classification: L11, L13, L95
Suggested Citation: Suggested Citation