Can Liberalization Affect the Price of Gas Imports? A Theoretical Analysis of the EU Case

Common wisdom about the effects of gas market liberalization in the EU claims that the fragmentation of gas supply in the downstream market can raise the price of gas imports, as the bargaining power of European firms in the upstream market would be weakened. We consider such a claim from the point of view of economic theory, by analysing the effects of downstream competition on the upstream price of gas. Though our analysis is limited by the assumption of a single gas producer upstream, we can show that the price of gas imports either is not affected by oligopolistic competition in the downstream market or it is even reduced in case of free entry and fierce competiton. In this last case the incumbent is damaged by economic losses, that can explain his attempt to prevent competition by introducing vertical restraints in the supply chain. Furthermore we show that, in this last case, the introduction of pro-competive constraits on the market share of the incumbent may damage consumers, as it raises prices in the retail market.