Научные исследования экономического факультета. Электронный журнал.

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Competition and security of supply after vertical integration: should Russia be kept off the downstream market for gas?

О.В.Кудрявцева Competition and security of supply after vertical integration: should Russia be kept off the downstream market for gas? // Научныеисследованияэкономическогофакультета. Электронный журнал. 2012. №2, с.178-203

We analyse the effect of vertical integration in a two-stage oligopoly where the supply of one of the upstreamplayers is insecure because this player suffers from stochastic costs. Hemay decide not to deliver if costs are too high. We formulate this situation as a model of the European gas market with Russia as the unreliable player but there are also other applications. While Russia’s attempts to buy considerable parts of the European downstream industry have faced strong political opposition, we argue that Russian participation in the downstream market would decrease consumer prices and increase the security of supply. We show that there are circumstances when the conventional wisdom that vertical integration is advantageous (Spengler, 1950, Abiru, 1988;Boots et al., 2004, for the gas market) is not always true. In Russia’s case, however, it is.

Key words: Gas, Security of supply, Competition, Vertical Integration, Nature resources.

JEL codes: L13, L95, D84.