The development of competition in the gas market. A micro economic analysis

This paper analyzes, from a theoretical point of view, the most likely strategy for an incumbent to face the threat of new competitors to enter the gas market. This strategy is suggested to monopolize the residual demand, so to leave new entrants choosing the quantity they are willing to sell in the market. However, this quantity will be probably bounded by the existing take-or-pay contracts. The potential barrier to entry arising from the take-or-pay contracts already signed could be high. The take-or-pay clause transforms a typical variable cost (the cost of gas) in a fixed cost so changing the incentive for an incumbent to define its strategy: pushing the quantity sold in the gas market below the take-or-pay level could be extremely expensive. It is argued that the less efficiency gap with respect to the incumbent (measured by means of the difference in marginal costs) the stronger the penetration of new competitors in the gas market. The implementation of a gas release program could be useful for development of concurrence. This would reduce directly the barrier set out by the existing take-or-pay contracts