Liberalizing the Gas Industry: Take‐Or‐Pay Contracts, Retail Competition and Wholesale Trade

Center for Research on Energy and Environmental Economics and Policy at Bocconi University Working Paper No. 49

48 Pages Posted: 24 May 2012  

Michele Polo

Bocconi University - Department of Economics

Carlo Scarpa

University of Brescia; NERA Economic Consulting

Date Written: May 23, 2012

Abstract

This paper examines retail competition in a liberalized gas market. Vertically integrated firms run both wholesale activities (buying gas from the producers under take-or-pay obligations) and retail activities (selling gas to final customers). The market is decentralized and the firms decide which customers to serve, competing then in prices. We show that TOP clauses limit the incentives to face-to-face competition and determine segmentation and monopoly pricing even when entry of new competitors occurs. The development of wholesale trade, instead, may induce generalized entry and retail competition. This equilibrium outcome is obtained if a compulsory wholesale market is introduced, even when firms are vertically integrated, or under vertical separation of wholesale and retail activites when firms can use only linear bilateral contracts.

Keywords: Entry, Segmentation, capacity constraints, wholesale markets

JEL Classification: L11, L13, L95

Suggested Citation

Polo, Michele and Scarpa, Carlo, Liberalizing the Gas Industry: Take‐Or‐Pay Contracts, Retail Competition and Wholesale Trade (May 23, 2012). Center for Research on Energy and Environmental Economics and Policy at Bocconi University Working Paper No. 49. Available at SSRN: https://ssrn.com/abstract=2065318 or http://dx.doi.org/10.2139/ssrn.2065318

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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