Modeling market power in the U.S. shale gas market

Abstract

Natural gas is becoming a fuel of choice for many energy consumption markets. In the United States, both the production and consumption of natural gas has recently increased with the advent of shale gas. This has result in markets where players who produce and sell shale gas can potentially exercise market power. In this paper, we compare two different methods of analyzing market power in energy markets with the United States natural gas market as an example. We show that these two methods yield different results, which imply that domain knowledge of markets is essential when deciding on the modeling paradigm. While both methods present an extreme in modeling market power, the results nevertheless provide relevant bounding scenarios for analyzing the future of shale gas in the United States.