Trading in the Downstream European Gas Market: A Successive Oligopoly Approach

A model of successive oligopoly is applied to the European natural gas market. The model has a two-level structure, in which Cournot producers are also Stackelberg leaders with respect to traders, who may be Cournot oligopolists or price takers. Several conclusions emerge. First, successive oligopoly ("double marginalization") yields higher prices and lower consumer welfare than if oligopoly exists only on one level. Second, due to the high concentration of traders, prices are distorted more by market power in trading than in production. Third, trader profits depend on whether producers can price discriminate among consuming sectors; if so, producers collect a greater share of the profits. Finally, when traders increase in number, prices approach competitive levels. Thus, it is important to prevent concentration in the downstream gas market. If oligopolistic trading cannot be prevented, vertical integration should not be discouraged, especially if it would increase the number of traders.

[1]  Bethany L. Nicholson,et al.  Mathematical Programs with Equilibrium Constraints , 2021, Pyomo — Optimization Modeling in Python.

[2]  U PatrikSoderholm,et al.  Fossil fuel flexibility in west European power generation and the impact of system load factors , 2001 .

[3]  Carol A. Dahl,et al.  A survey of energy demand elasticities in support of the development of the NEMS , 1993 .

[4]  Chin W. Yang,et al.  Advances in the Spatial Equilibrium Modeling of Mineral and Energy Issues , 1991 .

[5]  Hanif D. Sherali,et al.  A Mathematical Programming Approach to a Nash-Cournot Equilibrium Analysis for a Two-Stage Network of Oligopolies , 1988, Oper. Res..

[6]  J. Tirole.  The Theory of Industrial Organization , 1988 .

[7]  P. Zusman.  Spatial and temporal price and allocation models , 1971 .

[8]  Environmental Programme,et al.  Competition and Liberalization in European Gas Markets: A Diversity of Models , 1998 .

[9]  B. Hobbs,et al.  GASTALE. An oligopolistic model of production and trade in the European gas market , 2003 .

[10]  R. Pindyck.  The Structure of World Energy Demand , 1979 .

[11]  C. Dahl,et al.  European natural gas cost survey , 1993 .

[12]  Patrik Söderholm.  Fossil fuel flexibility in west European power generation and the impact of system load factors , 2001 .

[13]  Richard W. Cottle,et al.  Linear Complementarity Problem. , 1992 .

[14]  Knut Einar Rosendahl,et al.  Effects of Liberalizing the Natural Gas Markets in Western Europe* , 1995 .

[15]  R. Golombek,et al.  Increased Competition on the Supply Side of the Western European Natural Gas Market , 1998 .

[16]  Andrew Ellis,et al.  Structural change in Europe's gas markets: three scenarios for the development of the European gas market to 2020 , 2000 .

[17]  Hiroshi Ohta,et al.  Related Market Conditions and Interindustrial Mergers , 1976 .

[18]  T. Rutherford.  Extension of GAMS for complementarity problems arising in applied economic analysis , 1995 .

[19]  Lars Mathiesen,et al.  Computational Experience in Solving Equilibrium Models by a Sequence of Linear Complementarity Problems , 1985, Oper. Res..

[20]  H. Hashimoto.  A Spatial Nash Equilibrium Model , 1985 .

[21]  Yves Smeers,et al.  Computable Equilibrium Models and the Restructuring of the European Electricity and Gas Markets , 1997 .

[22]  P. Klemperer,et al.  Supply Function Equilibria in Oligopoly under Uncertainty , 1989 .

[23]  H. Ohta,et al.  Vertical Integration of Successive Oligopolists , 1979 .