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Forward Contracts, Market Structure and the Welfare Effects of Mergers

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  • Nathan H. Miller
  • Joseph U. Podwol

Abstract

We examine how forward contracts affect economic outcomes under generalized market structures. In the model, forward contracts discipline the exercise of market power by making profit less sensitive to changes in output. This impact is greatest in markets with intermediate levels of concentration. Mergers reduce the use of forward contracts in equilibrium and, in markets that are sufficiently concentrated, this amplifies the adverse effects on consumer surplus. Additional analyses of merger profitability and collusion are provided. Throughout, we illustrate and extend the theoretical results using Monte Carlo simulations. We discuss the practical relevance for antitrust enforcement.

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  • Nathan H. Miller & Joseph U. Podwol, 2020. "Forward Contracts, Market Structure and the Welfare Effects of Mergers," Journal of Industrial Economics, Wiley Blackwell, vol. 68(2), pages 364-407, June.
    • Handle: RePEc:bla:jindec:v:68:y:2020:i:2:p:364-407
    DOI: 10.1111/joie.12222
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    Cited by:

    1. Brown, David P. & Eckert, Andrew & Shaffer, Blake, 2023. "Evaluating the impact of divestitures on competition: Evidence from Alberta’s wholesale electricity market," International Journal of Industrial Organization, Elsevier, vol. 89(C).
    2. Nathan H. Miller & Gloria Sheu, 2021. "Quantitative Methods for Evaluating the Unilateral Effects of Mergers," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 58(1), pages 143-177, February.
    3. Gallego, Camilo A., 2022. "Intertemporal effects of imperfect competition through forward contracts in wholesale electricity markets," Energy Economics, Elsevier, vol. 107(C).

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