Iranian Journal of Economic Research

Evaluating the Efficiency of the "Take or Pay Condition" in International Contracts for the Sale of Gas: Game Theory Approach

Document Type : Research Paper

Authors

Davood Daneshjafari 1
Mohammadmahdi Hajian 2
Javad Jafarzadeh 3

1 Associate Professor of Economics, of Allameh Tabataba’i University, Tehran, Iran

2 Assistant Professor of Law, Allameh Tabataba’i University, Tehran, Iran

3 Ph.D. of Oil and Gas Economics, Allameh Tabataba’i University, Tehran, Iran

https://doi.org/10.22054/ijer.2021.63047.1028
Abstract
In long-term gas contracts, there is usually a risk for the seller that the buyer will refuse to take delivery. For this reason, the condition of obligation to take or pay in such contracts has become common. Commitment condition is a condition that obliges the buyer in the gas sales contract to pay the seller a part of the contract price, which is determined as a percentage of the total amount, even if he does not receive the agreed gas volume. The research question is whether this condition has economic efficiency? Will a long-term balance between buyer and seller be an option for this condition in the contract or not? To answer these question, first, with the concept of evolutionary game theory, we have shown a picture of contracts before the existence of this condition and after its formation. Then, by setting the normal form of the game and using Python software, we have repeated this game thousand times, the results show that accepting the condition of commitment to take or pay will be stable evolutionary equilibrium. From this perspective, the inclusion of such a condition in the contract creates economic efficiency, and the policy recommendation in this regard would be for policy makers to prefer a lower definite income to a higher probable income by including such a condition.

Keywords

Take or Pay Contract
Economic Efficiency
Game Theory
Subjects
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  • Receive Date 24 August 2021
  • Revise Date 06 September 2021
  • Accept Date 07 September 2021
  • First Publish Date 24 November 2021

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