Oil Price Indexing of Natural Gas Prices - An Economic Analysis

Review of Economics, Vol. 3, pp. 250-264, 2007

Posted: 6 Sep 2008

See all articles by Karl Morasch

Karl Morasch

affiliation not provided to SSRN

Florian W. Bartholomae

Munich Business School; University of the German Federal Armed Forces - Universität der Bundeswehr München

Date Written: 2007

Abstract

Oil price indexing is a peculiar feature of the natural gas markets in Germany and other European countries. It is closely linked to the existence of local monopolies (at least de facto) and of the so called "take-or-pay" (TOP) contracts. After discussing the relation between these features and the motivations for oil price indexing, we formally analyze this strategy in a differentiated good oligopoly with a monopolistic supplier of natural gas and competing oil distributors. Starting with a symmetric setting, we first point out how oil price indexing works as a collusive device. In a second step we account for the likely asymmetries between oil and gas distributors. We show that the result obtained under symmetry is not robust and we discuss how the impact of oil price indexing on prices, profits and welfare depends on the form and extent of the asymmetries.

Keywords: Natural gas market, Oligopoly, Oil price indexing, Take-or-pay contracts

JEL Classification: D43, L41, L59

Suggested Citation

Morasch, Karl and Bartholomae, Florian W., Oil Price Indexing of Natural Gas Prices - An Economic Analysis (2007). Review of Economics, Vol. 3, pp. 250-264, 2007, Available at SSRN: https://ssrn.com/abstract=1263803

Karl Morasch

affiliation not provided to SSRN ( email )

Florian W. Bartholomae (Contact Author)

Munich Business School ( email )

Elsenheimerstraße 61
Munich, Bavaria 80687
Germany

University of the German Federal Armed Forces - Universität der Bundeswehr München ( email )

Werner-Heisenberg-Weg 39
Neubiberg
Munich, 85579
Germany

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