Market Liberalization in the European Natural Gas Market - The Importance of Capacity Constraints and Efficiency Differences

53 Pages Posted: 14 Jul 2009

See all articles by Steven Brakman

Steven Brakman

University of Groningen - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Charles van Marrewijk

Utrecht University - School of Economics

Arjen van Witteloostuijn

University of Groningen - Faculty of Economics and Business

Date Written: July 2009

Abstract

In the European Union, energy markets are increasingly being liberalized. A case in point is the European natural gas industry. The general expectation is that more competition will lead to lower prices and higher volumes, and hence higher welfare. This paper indicates that this might not happen for at least two reasons. First, energy markets, including the market for natural gas, are characterized by imperfect competition and increasing costs to develop new energy sources. As a result, new entrants in the market are less efficient than incumbent firms. Second, energy markets, again including the market for natural gas, are associated with capacity constraints. Prices are determined in residual markets where the least efficient firms are active. This is likely to lead to price increases, rather than decreases.

JEL Classification: D40, L10, L50

Suggested Citation

Brakman, Steven and van Marrewijk, Charles and van Witteloostuijn, Arjen, Market Liberalization in the European Natural Gas Market - The Importance of Capacity Constraints and Efficiency Differences (July 2009). CESifo Working Paper Series No. 2697. Available at SSRN: https://ssrn.com/abstract=1433668

Steven Brakman (Contact Author)

University of Groningen - Department of Economics ( email )

P.O. Box 800
9700 AV Groningen
Netherlands
+31 50 363 3746 (Phone)
+31 50 363 3730 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Charles Van Marrewijk

Utrecht University - School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, 3584 EC
Netherlands
*31-(0)30-2539810 (Phone)

HOME PAGE: http://www.charlesvanmarrewijk.nl

Arjen Van Witteloostuijn

University of Groningen - Faculty of Economics and Business ( email )

Postbus 72
9700 AB Groningen
Netherlands

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