Liberalization and Market Segmentation in the Natural Gas Industry

This paper examines competition in the natural gas industry, with a reference to the recent European liberalization plans. Each ̄rm, endowed with a (limited) low cost capacity, participates in a decentralized market where it contracts directly with the individual customers paying each time a ̄xed fee. Contracting costs and price competition make entry in the same submarkets unpro t̄able, while limited low cost capacity avoids the monopolization of the market. As a result, in the non cooperative equilibrium entry occurs but segmentation and monopoly prices, rather then competition, arises. This result holds in both the sequential and simultaneous entry cases. Moreover, a more relaxed price competition environment, inducing entry, destroys segmentation and makes ̄rms worse o®. Finally, in a centralized market where ̄rms face the aggregate demand, prices and pro ̄ts are lower.