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Strategic Interdependence in European East-West Gas Trade: A Hierarchical Stackelberg Game Approach

The current and potential benefits of European East-West gas trade are enormous for all participants. The new and more complex structure of the natural gas transit system, as emerged with political and economic changes in Eastern Europe and the former Soviet Union, has created uncertainties about the interdependence and interactions among the participants. Using a Stackelberg game with three layers of players (suppliers, transiters and importers), this paper establishes a framework to analyze rational behaviors of the participants and reasonable ways to formulate transparent, flexible, and incentive-compatible contracts. This framework is also used to show how to modify the trade contract to accommodate changes in the gas trade environment. Improving predictability of the players' reactions to external changes can enhance the reliability of gas trade and allow its expansion to benefit all participants.

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Energy Specializations: Natural Gas – Pipelines ; Natural Gas – Markets and Prices; Natural Gas – Policy and Regulation

JEL Codes:
N5 -
L13 - Oligopoly and Other Imperfect Markets
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: Natural gas, Russia, Eastern Europe, gas industry, Hierarchical Stackelberg game, trade

DOI: 10.5547/ISSN0195-6574-EJ-Vol17-No3-5

Published in Volume17, Number 3 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.