Review of Industrial Organization 18: 379–396, 2001.
© 2001 Kluwer Academic Publishers. Printed in the Netherlands.
Strategic Responses to Regulatory Policies: What
Lessons Can Be Learned from the U.K. Contract
Department of Economics, University of York, York, YO1 5DD, and Centre for Economic Policy
Research (CEPR), London, U.K.
Economics Department, Middlesex University Business School, The Burroughs, London, NW4 4BT,
Abstract. The gas industry was ﬁrst privatised in 1986, and the regulator, Ofgas, identiﬁed the
contract gas market as a possibility for introducing initial competition into the industry. Nevertheless,
competing shippers were slow in entering the market. Subsequently, Ofgas introduced a series of pro-
competitive policies. It, however, invoked a series of strategic behaviour by the incumbent shipper,
British Gas. The effectiveness of these measures are analysed here with respect to the evolving
competitive process. The issues it raised, especially when formulating future regulatory policies and
theories, are also considered.
Key words: Gas supply, network access, regulation and competition policy, strategic behaviour.
JEL Classiﬁcations: L12, L22, L43, L95.
The current debates and issues relating to privatisation and regulation policies were
identiﬁed in Newbery (1997). He maintains that the introduction of competition
into previously monopolised and regulated utilities is essential in ensuring that the
full beneﬁts of privatisation can be realised. Regulation is basically inefﬁcient and
an imperfect substitute to achieving efﬁcient outcomes. Regulatory theorist and
policy-makers are at present actively engaged in determining the optimal way of
We would like to thank Ali Al-Nowaihi, George Norman, Catherine Waddams Price and Tom
Weyman-Jones for their insightful comments. An earlier version of this paper was presented at the
Energy Economics Conference, University of Warwick, December 1997 and Centre for Network
and Communications Economics Meetings, University of Auckland, 15–16th July 1998. The second
author thanks the participants, especially John Small, for their valuable comments and encouraging
remarks. We also gratefully acknowledge helpful comments made by the two anonymous referees. Fi-
nally, we are also thankful to John Hall Associates for making available their datasets. Any omissions
or mistakes are entirely ours.