Entry Without Competition

IGIER Working Paper No. 245

33 Pages Posted: 12 Jan 2004

See all articles by Michele Polo

Michele Polo

Bocconi University - Department of Economics

Carlo Scarpa

University of Brescia; NERA Economic Consulting

Date Written: November 2003

Abstract

This paper examines competition in a liberalized market, with reference to some key features of the natural gas industry. Each firm has a low (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. We show that under both sequential and simultaneous entry, there is a strong incentive to segment the market: when take-or-pay obligations are still to be covered, entering and competing for the same customers implies low margins. If instead a firm is left as a monopolist on a fraction of the market, exhausting its obligation, it has no further incentive to enter a second market, where the rival will be monopolist as well. Hence, we obtain entry without competition. Antitrust ceilings do not prevent such an outcome while a wholesale pool market induces generalized competition and low margins in the retail segment.

Suggested Citation

Polo, Michele and Scarpa, Carlo, Entry Without Competition (November 2003). IGIER Working Paper No. 245. Available at SSRN: https://ssrn.com/abstract=467860 or http://dx.doi.org/10.2139/ssrn.467860

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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