โ Scribed by Mccabe, Kevin A. ;Rassenti, Stephen J. ;Reynolds, Stanley S. ;Smith, Vernon L.
No coin nor oath required. For personal study only.
In this article we consider a redesigned market system for natural gas that exploits existing possibilities for competition. Such a market-oriented system would allow important efficiency gains to be achieved, gains that could be distributed among both consumers and firms in the natural gas industry. A workable market mechanism must cope with certain features of the industry: pipeline economies of scale, market power of some firms, and flowcoordination problems over the network, We focus on a particular type of auction market mechanism that we believe is a promising vehicle for providing efficient competition.
As a consequence of technological economies of scale in pipeline transportation, natural gas has been considered a classic case of natural monopoly. But entry, growth, and development in the industry in the United States have yielded more than one pipeline in most producing fields. Similarly, most wholesale markets are served by at least two pipelines.'
The concept of natural monopoly is a static concept, that is, given any level of demand, declining long-run marginal planning cost implies that om pipeline-a very large one, if demand is high-yields the least-cost solution to satisfying that demand. In fact, demand is cyclical and tends to p w over time, and new gas wells and gas fields develop over time. Therefore, the first pipelines were of modest size, with parallel, larger lines laid as demand grew. The result is multiple supply sources for most wholesale mar-Kevin A. hfccpk Md Stepken J. R m & * w e n s m c h m of h e Economir Sckncr Laboratoqy, Univers@ of Stanky S. Reynolds ir ossrrckteprofesrnr of economics at the university. Vermn L Smith K professor of economics d #c univrt-dy and director of research at the hbomtory.
kets, just as in such other industries as steel, automobiles, and electrical appliances. This raises the question of whether prices and allocations in the industry could not be disciplined satisfactorily by competitive forces as a replacement for some of the public regulatory apparatus.
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