Price patterns resulting from different producer behavior in spatial equilibrium

Abstract

We are concerned with economic analyses of markets from the perspective of supporting a decision maker selling in the market. The competitive pressure and the price formation are central issues. The goal of this paper is to highlight the remarkably different price patterns obtained from different modes of seller behavior in a spatial market. This is exemplified by models of price taking versus the oligopolistic Cournot mode of behavior. Although a particular market, namely the European market for natural gas is used for illustration, the insights from this exercise apply to any industry where suppliers have market power, their locations differ, and their costs of supplying individual segments of the market are non-negligible and differ. When market power is present and one seeks insight into competition and price formation, details in other dimensions cannot compensate for not modeling the exertion of market power.