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ECN publication
Trading in the downstream European gas market. A successive oligopoly approach
Published by: Publication date:
ECN Policy Studies 1-1-2005
ECN report number: Document type:
ECN-RX--05-063 Article (scientific)
Number of pages:

Published in: The Energy Journal (IAEE), , 2005, Vol.25, p.73-102.

A model of successive oligopoly is applied to the European natural gasmarket. 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.

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