Take or Pay Contracts and Market Segmentation

IEFE Working Paper No. 5

41 Pages Posted: 21 Nov 2007 Last revised: 26 Mar 2008

See all articles by Michele Polo

Michele Polo

Bocconi University - Department of Economics

Carlo Scarpa

University of Brescia; NERA Economic Consulting

Date Written: July 11, 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.

Keywords: entry, segmentation, decentralized market

JEL Classification: L11, L13, L95

Suggested Citation

Polo, Michele and Scarpa, Carlo, Take or Pay Contracts and Market Segmentation (July 11, 2007). IEFE Working Paper No. 5. Available at SSRN: https://ssrn.com/abstract=1031629 or http://dx.doi.org/10.2139/ssrn.1031629

Michele Polo (Contact Author)

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Carlo Scarpa

University of Brescia ( email )

Via San Faustino 74B
Dipartimento di Scienze Economiche
25122 Brescia
Italy
+39+030+2988+833 (Phone)
+39+030+2988+839/840 (Fax)

NERA Economic Consulting ( email )

50 Main Street, 14th Floor
White Plains, NY 10606
United States

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