Territorial Restrictions and Consumer Welfare in a Mixed Oligopoly: The Japanese Gas Supply Market (in Japanese)

Eiji Satoh

Economic Analysis, 2015, vol. 189, 25-42

Abstract: This study empirically examines the welfare effects of territorial restrictions on town gas services in Japan by modeling the choice of gas service made by a set of households. The Japanese gas market includes two major types of gas services: the liquefied petroleum (LP) gas service and the town gas service. Although LP gas prices and LP gas service areas are not regulated, town gas prices and town gas service areas are heavily regulated by the government. Particularly, territorial restrictions on town gas services essentially prohibit providers of town gas from expanding their service area. Logically, the government should readjust town gas service areas frequently in response to demand. However, town gas service areas have not been readjusted. Territorial restrictions on town gas service areas could cause a loss in consumer welfare. Using data on the Japanese gas market for the period from 1998 to 2005, and deploying a two-stage procedure, this study analyzes whether territorial restrictions on Japanese town gas services cause a loss in consumer welfare. First, a demand model, assumed to have a nested logit structure, is estimated. The estimation reveals that the characteristics of gas services play a significant role in demand substitution between town gas and LP gas. Second, using the estimated demand parameters, a simulation exercise is conducted; the outcome indicates that an expansion of town gas services to areas without town gas pipelines has allowed some households to switch from LP gas to town gas. In the static Cournot competition among LP gas suppliers, this switch results in an intensification of competition among these suppliers, leading to a decrease in LP gas prices (5.8%) and a consequent improvement in consumer welfare (13.8%). These results suggest that the government should facilitate an expansion of town gas services to areas without town gas pipelines. JEL Classification: L43, L95

Keywords: consumer welfare; simulation analysis; territorial restrictions (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (1)

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