Forward integration and market entry: Evidence from natural gas markets for household customers in Germany

Abstract

Due to potential abuse of the market power at wholesale and retail market level for natural gas the Federal Cartel Office in Germany prohibited further forward integration of gas importing firms with retail incumbents from 2005/2006 to 2010. The Authority argued that the very few dominant gas importing companies, which also own and operate the gas pipelines, could have an incentive to foreclose existing competitors or prevent potential market entry. However, two of the importing companies remained extensively forward integrated. To analyze possible forward integration issues empirically we employ cross sectional data (for September 2009) for about 500 sub markets for household customers in Germany. These submarkets have different vertical ownership structures. Our data set contains information on ownership and market entry. By applying a market entry model, which is based on the framework introduced by Bresnahan and Reiss (1991), we do not find clear evidence that market entry is restricted by forward integration of gas importers and retail incumbents.