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The Functional and the Instrumental in Market Definition: a Laboratory for Natural Experiments in the Baltics
Функциональное и инструментальное в определении рынка: лаборатория естественных экспериментов на Балтике
[journal article]
Abstract Reforms of natural monopolies need clear delineations between the industries where market mechanisms contribute to social welfare and those where the costs of a transition to a market economy outweigh the benefits. In this article, we emphasise the difficulty of finding the optimum modes of governan... view more
Reforms of natural monopolies need clear delineations between the industries where market mechanisms contribute to social welfare and those where the costs of a transition to a market economy outweigh the benefits. In this article, we emphasise the difficulty of finding the optimum modes of governance within industries as a whole. Using the tools of the transaction cost economics, we show that, alongside the problem of market boundaries and the resultant position and behaviour of a company — an object of antimonopoly regulation — it is necessary to consider the hypothesis about the market being a special mechanism for coordinating interactions between economic entities. In particular, such determinants of transactions as asset specificity, uncertainty, and frequency can create a basis for abandoning the price mechanism. Williamson’s heuristic models suggest that if an activity is characterized by high specificity, uncertainty, and frequency, the very organisation of this activity precludes transaction cost minimisation through the price mechanism employed either in full or in part (hybrid institutional agreements). This can be explained by excessive risks and ensuing high transaction costs. A more efficient solution is the organisation of interactions within a group of legal entities in control (within a single economic entity). In order to compare the practical implementation of institutional alternatives, we examine the modes of governance in the gas supply industry. A major focus is the Baltic region where two interconnected pipelines — the Nord Stream and the OPAL — were constructed. Different ways to handle transactions relating to gas supply were employed at the time. We compare these ways and conclude that it is necessary to consider the determinants of a transaction to select the best structural alternative and to avoid choosing a wrong governance structure.... view less
Keywords
Baltic States; Baltic region; natural gas; monopolization; transaction costs; governance; energy supply; market mechanism; market price; cartel; economic model; antitrust office
Classification
Business Administration
Free Keywords
market; transaction; modes of governance; hierarchy; gas; pipelines
Document language
English
Publication Year
2018
Page/Pages
p. 4-25
Journal
Baltic Region, 10 (2018) 2
DOI
https://doi.org/10.5922/2079-8555-2018-2-1
ISSN
2079-8555
Status
Published Version; peer reviewed