Oil Price Indexing Of Natural Gas Prices: An Economic Analysis

Oil price indexing is a peculiar feature of the natural gas markets in Germany and other European countries. It is closely linked to the existence of local monopolies (at least de facto) and of the so called "take-or-pay" (TOP) contracts. After discussing the relation between these features and the motivations for oil price indexing, we formally analyze this strategy in a differentiated good oligoply with a monopolistic supplier of natural gas and competing oil distributors. Starting with a symmetric setting, we first point out how oil price indexing works as a collusive device. In a second step we account for the likely asymmetries between oil and gas distributors. We show that the result obtained under symmetry is not robust and we discuss how the impact of oil price indexing on prices, profits and welfare depends on the form and extent of the asymmetries.