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The impact of asymmetric regulation on surplus and welfare: the case of gas release programmes

By Cédric Clastres and Laurent David

Abstract

Gas release programmes, or capacities release, and market shares constraints are the two asymmetric regulations imposed on incumbents in energy markets. In this paper, we focus on gas release, its impact on welfare or consumer surplus and on the optimal level of released quantities set by regulators. We use a Cournot model with capacity constraints in order to study gas release and we put forward two conclusions. First, we compute the impact of these strategies on consumer surplus and welfare. We show that there is no impact on consumer surplus, but welfare can decrease as gas release can induce raising rival's costs (RRC) or 'self-sabotage' strategies. Then, we demonstrate that the regulator must set released quantities according to the information held on the incumbent's supplies to maximise welfare. Finally, we conclude that the regulator can avoid RRC or self-sabotage strategies by setting gas-released quantities. As proven from empirical studies, these quantities should not be too high so that a significant difference between capacities of both competitor and incumbent make it possible to avoid collusive behaviours. Copyright 2009 The Authors. Journal compilation 2009 Organization of the Petroleum Exporting Countries.

DOI identifier: 10.1111/j.1753-0237.2009.00168.x
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