Reinforcing Buyer Power: Trade Quotas and Supply Diversification in the EU Natural Gas Market

We consider a market with concentrated domestic buyers and concentrated foreign sellers and explore the extent to which domestic regulation helps to increase the buyers' countervailing power against the foreign sellers. We use the Shapley value to describe the distribution of the trade surplus and market power in this bilateral oligopoly. With the EU natural gas market in mind, we consider how a regulator (the EU) can use import quotas and encourage supply diversification to strengthen the buyers' power and increase their surplus. We find that buyers can benefit from bilateral but not aggregate trade restrictions. Those who invest in supply diversification gain, with other buyers enjoying positive externalities; sellers lose profits and power. Thus we provide a rationale for the current EU support for importers' investment plans.