The purpose of this chapter is to outline the basic methodology used in this study. To simplify the exposition, the more complex or technical aspects of the methodology are presented in subsequent chapters where an issue is initially encountered and analyzed. Since the study considers three time periods (i.e., short, intermediate, and long runs), the methodology common to all three periods is explained in this chapter.
This study estimates the effects of potential entry on market concentration. Thus, the initial steps involve defining the product market, the geographic market, and the concentration measure. One contribution of the study lies in its use of antitrust concepts to identify potential entrants and its ability to quantify the impact of entry on concentration. Since the ability to enter a market depends, in part, on the length of the adjustment or time period, three "runs" are considered. Each of these principal components of the methodology is discussed below.
We identify antitrust markets by identifying the smallest group of products and area subject to market power. To determine the product and geographic market, we consider whether a group of perfectly colluding suppliers (i.e., a hypothetical monopolist) could profitably raise the price of natural gas 5 to 10 percent above cost without inducing consumers to switch to alternative products or suppliers. 1 Thus, the market definition considers (1) the substitution among competing products in the same geographic