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Copyright (c) 1989 Yale University
Yale Journal on Regulation

ARTICLE: Is Competitive Entry Free? Bypass and Partial Deregulation in Natural Gas Markets

SUMMER, 1989

6 Yale J. on Reg. 209


Paul W. MacAvoy [+] and Daniel F. Spulber [+][+] and Bruce E. Stangle [+][+][+]


Partial deregulation has occurred in a broad range of industries, from telecommunications to transportation to financial services. 1 This first phase of deregulation has given impetus to an intensive debate over future regulatory policy. Some commentators advocate further partial deregulation of industries such as natural gas and electric power 2 while others push for re-regulation of airlines and railroads. 3 The immediate question is whether the deregulation that has taken place will achieve the benefits of market competition or will create instead imperfect markets that are neither fish nor fowl, markets that are less efficient than if they were either fully regulated or fully competitive. The question arises from the inherent nature of partial deregulation, which often maintains price controls and other restrictions on incumbent firms while removing entry barriers. This disparity may cause entrants to "bypass" established regulated facilities. The results may be costly duplication of capital facilities, higher prices for consumers, and paradoxically, an increase in regulation as policymakers seek to "manage" the resulting competition.

Markets that are partially deregulated in this way do not present firms with an equal opportunity to compete. New entrants to those markets must make irreversible investments in capacity while incumbent firms already have sunk these costs. However, incumbent firms face such restrictions as rate regulations , common carrier obligations, and other limits on their contractual commitments. Furthermore, regulation of access to the established firm's facilities may operate to subsidize entrants. Efforts by various regulatory ...
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