Buyer power in the european gas market

  • Melina Caldas Cabrera Economic Studies Division, INDECOPI


The levels of consumption of gas in the European Union have been increasing considerably in the last years. Given that domestic resources are becoming scarce and imports come mainly from three countries, European policymakers argue that there is a need to guarantee the security of supply. For this, they propose the creation of big distribution companies, which are believed to have a bargaining power that enables them to offset the market power upstream. The article analyzes this policy from a theoretical perspective using models of buyer power. In particular, the models of Chipty and Snyder (1999) and Inderst and Wey (2003), which associate the existence of bargaining power to the shape of the cost function in the upstream market, are presented and analyzed. Given the characteristics of the gas production technology, we expect the cost function of gas suppliers to be convex in early stages of production and to become concave as cheaper fields are deployed and new fixed investments are required in order to develop new and more expensive fields. We conclude that only in convex stages of the cost function, it will be convenient for gas retailers to merge.


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