THE LONG RUN
In the intermediate run, only those nearby suppliers who can meet two conditions within a two-year period are potential entrants and therefore members of the colluding group. A nearby supplier must be able to (1) construct a pipeline hookup into the new market (i.e., meet the distance requirement) and (2) divert sufficient gas into the new market to undercut the colluding group if denied admission (i.e., meet the size requirement). Nearby suppliers who fail to meet either one of the above conditions are excluded from the colluding group.
In the long run, however, all nearby suppliers who meet the distance requirement are potential entrants. The inability of some suppliers to meet the size requirement in the intermediate run does not exist in the long run. Existing contracts can be renegotiated or allowed to expire. If necessary, trunk-line capacity can be increased. Thus, pipelines are assumed to have sufficient divertible throughput to service new entry markets or new customers in the long run. Similarly, storage operations, intrastate suppliers, and foreign suppliers can also expand service to accommodate any shortages in peak demand periods.
Potential entrants are assumed to bid for supply contracts before building a pipeline hookup into a new market or acquiring an existing hookup. 1 The competitive issue, therefore, is whether rival bidders can successfully collude to raise the contract price over cost and share in the excess profits. From an economic perspective, potential entrants are therefore more correctly viewed as potential bidders.
Competition in natural gas delivery markets takes place in the bidding market for gas service. LDCs, for example, can solicit bids in the present to