Strategic interdependence in the
            East-West gas trade : a hierarchical Stackelberg game approach
The current and potential benefits of
            the East-West gas trade are enormous for all participants.
            Realizing those benefits requires significant upfront
            investments.  But the new, more complex structure of the gas
            transit system that has emerged following changes in Eastern
            Europe and the former Soviet Union has created uncertainties
            that bear on the expected benefits from investment.  The
            authors argue for the existence of stable contracts that
            would create an environment more conducive to investments
            and allow all participants to benefit from expansion of the
            gas trade.  As a guide to formulating incentive-compatible,
            transparent, flexible contracts, they propose a framework
            based on a Stackelberg game, with three players (a supplier,
            a transiter, and an importer) under Russia's
            leadership.  They use this framework to analyze the contract
            modifications that would ensue from changes affecting the
            gas trade.   They concluded that: (a) increased
            competitiveness of the transiter and supplier through cost
            reductions would improve the payoffs to all players (the
            transiter's and supplier's profits and the Western
            importer's welfare).  Strategic behavior on the part of
            the supplier and transiter would ultimately reduce the price
            to the importer, enlarging gas demand and reducing costs.
            If increased competitiveness is the outcome of more costly
            gas from sources other than Russia, both the supplier's
            and the transiter's payoffs would improve but the
            importer's welfare would deteriorate.  The supplier and
            transiter would have leeway to strategically raise their
            price and transit fee, respectively, while gaining market
            share.  But the importer would face rising costs for gas
            imports and would lose welfare;  (b) an increase in the
            scope for the importer to substitute between alternative
            sources of gas improves welfare for all three players.  The
            perception by the supplier and transiter of increased threat
            of competition leads to a preemptive move not to lose market
            share.  The transiter and supplier reduce the transit fee
            and supply price, respectively, allowing the importer to
            face a lower gas price.  Import demand expands and welfare
            improves.  The expanded trade more than compensates for the
            reduction in the transit fee an supply price and allows
            larger payoffs for transiter and suppliers; and (c) the
            perception of increased reliability of Russian gas supplies
            expands demand for Russian gas and leads to the expansion of
            trade.  The supplier and transiter can raise their
            respective charges with expanded volume, improving their
            payoffs.  The importer's welfare deteriorates as the
            cost of importing gas rises. The predictability of the
            players' reactions to changes in the environment would
            build confidence in the reliability of gas trade and allow
            its expansion benefiting all participants.