Strategic Capacity Investments in an Imperfectly Competitive World Natural Gas Market
In this paper, we develop a model for the world natural gas market where buyers and sellers are connected by a trading network. However, this paper extends Cigerli (2013) by relaxing the assumption of fixed supply capacities and allowing for natural gas producers to invest in their supply capacities. We assume a two period model with no uncertainty and show that there is a unique Cournot-Nash equilibrium and the open-loop Cournot-Nash equilibrium and closed-loop Cournot-Nash equilibrium investments coincide. We apply this model to a network formed by using BP’s Statistical Review of World Energy 2010 major trade flows. Later, we change model parameters exogenously to analyze various policy scenarios. We find that producers respond to changes in market conditions by investing in their supply capacities instead of displacing their resources from other markets.