Description:
The natural gas pipeline transportation industry has a long history of regulatory interventions limiting the market power of the pipeline owner. Most studies, however, focus on the static efficiency of the corresponding contract structures. For more realistic results, we consider transportation capacity as a durable good and analyze the dynamic efficiency of structures such as leasing and the selling of tradable rights with or without secondary markets and futures markets. Compared to a lease contract structure-where the pipeline owner controls the transportation capacity at all periods-the selling of tradable rights with a competitive secondary market dissipates the monopolist's market power and leads to higher social welfare. However, the monopolist's participation in the futures market can reduce welfare by providing him with a credible way to restrain production in future periods, thus restoring the market power he enjoyed in a lease situation.