Competition in the Natural Gas Pipeline Industry: An Economic Policy Analysis

By Edward C. Gallick | Go to book overview

therefore affect the pricing decisions of interstate, pipelines, especially in a deregulated enviroranent. 54 The decline in gas prices since 1983, however, makes LNG imports relatively costly sources of supply. The reliance on LNG suppliers in the future is therefore uncertain.


The Constant Elasticity Case

If the colluding group of current suppliers is subject to a constant elasticity demand curve instead of a linear demand curve, a larger percentage of current market output 55 is necessary to gain admission into the colluding group. As explained in Appendix C, 65 percent of current output is required to enter the colluding group. With the larger size requirement, some potential entrants in the linear demand case may be too small to pose a threat to a colluding group. As the number of bidders in the market declines, the possibility of anticompetitive behavior may increase.

The HHI for each of the 148 entry markets is therefore recomputed using the larger size requirement. Table 5.8 shows the HHI distribution for potential entrants within 140 miles of the market. The number of entry markets with a HHI < 2500 decline by only two percent (from 129 to 126 markets) relative to the corresponding HHI distribution in Table 5.7, the linear demand case. 56

The constant elasticity case therefore adds little to our analysis. Furthermore, for WR > ER, the number of bidders in the market is grossly underestimated regardless of the demand elasticity. 57 The slightly higher number of competitive markets in the linear demand case tends to partially offset the substantial downward bias in the ER. For both reasons, we consider only the linear demand case in the remainder of this study.


CONCLUSION

Our analysis suggests that potential entry is an important restraint on the exercise of market power in the largest 148 markets. That is, a number of nearby suppliers could construct and operate a 140-mile hookup (within a two-year period) in response to a 5 to 10 percent price increase by collusive incumbent firms. In addition, most of these suppliers could generate sufficient divertible gas to feed their new hookup in the intermediate run and earn at least a competitive return on their investment.

Any one of these potential entrants is large enough to offset the profit- maximizing output reduction by the colluding group of current suppliers. 58 If the colluding group is expanded to include such potential entrants, the group is likely to become so large that it will be unable to maintain a

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Competition in the Natural Gas Pipeline Industry: An Economic Policy Analysis
Table of contents

Table of contents

  • Title Page iii
  • Contents vii
  • Tables and Figures ix
  • Preface xi
  • Acknowledgments xv
  • 1 1
  • 2 - The Natural Gas Industry 9
  • 3 - The Methodology 19
  • Introduction 19
  • 4 - The Short Run 39
  • 5 - The Intermediate Run 49
  • Introduction 49
  • Conclusion 69
  • 6 - The Long Run 73
  • 7 - The Policy Choice 89
  • Introduction 89
  • Appendix A MSAs CLASSIFIED BY STATE 93
  • Appendix B STANDARD MARKET SHARE REPORT 105
  • Appendix C THE SIZE OF THE POTENTIAL ENTRANT 131
  • Notes 135
  • Appendix D U.S. CENSUS REGIONS 139
  • Appendix E NEARBY SUPPLIERS BY TYPE AND BY MARKET 141
  • Notes 243
  • References 273
  • Index 279
  • About the Author 285
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