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Increasing marginal costs are strategically beneficial in forward trading

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  • Breitmoser, Yves

Abstract

The possibility of forward trading has been shown to restore social efficiency in Cournot oligopolies if marginal costs are constant. The paper analyzes the more general case that marginal costs are non-decreasing. I show that increasing marginal costs diminish the “strategic substitutability” between firms’ quantities, i.e. firms react less to quantity changes of opponents, and that this prevents convergence to social efficiency. Thus, increasing marginal costs have a competition-reducing effect in forward trading, and this effect is so strong that equilibrium prices may even increase after cost reductions—when the cost curvature increases simultaneously. This also shows that competition by forward trading differs qualitatively from both Cournot and Bertrand competition.

Suggested Citation

  • Breitmoser, Yves, 2013. "Increasing marginal costs are strategically beneficial in forward trading," Economics Letters, Elsevier, vol. 119(2), pages 109-112.
    • Handle: RePEc:eee:ecolet:v:119:y:2013:i:2:p:109-112
    DOI: 10.1016/j.econlet.2013.01.030
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    References listed on IDEAS

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    1. Allaz Blaise & Vila Jean-Luc, 1993. "Cournot Competition, Forward Markets and Efficiency," Journal of Economic Theory, Elsevier, vol. 59(1), pages 1-16, February.
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    7. Hughes, John S. & Kao, Jennifer L., 1997. "Strategic forward contracting and observability," International Journal of Industrial Organization, Elsevier, vol. 16(1), pages 121-133, November.
    8. Breitmoser, Yves, 2012. "On the endogeneity of Cournot, Bertrand, and Stackelberg competition in oligopolies," International Journal of Industrial Organization, Elsevier, vol. 30(1), pages 16-29.
    9. Powell, Andrew, 1993. "Trading Forward in an Imperfect Market: The Case of Electricity in Britain," Economic Journal, Royal Economic Society, vol. 103(417), pages 444-453, March.
    10. Ferreira, Jose Luis, 2003. "Strategic interaction between futures and spot markets," Journal of Economic Theory, Elsevier, vol. 108(1), pages 141-151, January.
    11. Liski, Matti & Montero, Juan-Pablo, 2006. "Forward trading and collusion in oligopoly," Journal of Economic Theory, Elsevier, vol. 131(1), pages 212-230, November.
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    Cited by:

    1. David P. Brown & Andrew Eckert, 2017. "Electricity market mergers with endogenous forward contracting," Journal of Regulatory Economics, Springer, vol. 51(3), pages 269-310, June.
    2. Brown, David P. & Sappington, David E.M., 2020. "Load-Following Forward Contracts," Working Papers 2020-14, University of Alberta, Department of Economics, revised 31 Dec 2021.

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    More about this item

    Keywords

    Forward trading; Duopoly; Social efficiency; Cournot; Bertrand;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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