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The length of contracts and collusion

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Author Info

  • Green, Richard
  • Le Coq, Chloé

Abstract

Many commodities (including energy, agricultural products and metals) are sold both on spot markets and through long-term contracts which commit the parties to exchange the commodity in each of a number of spot market periods. This paper shows how the length of contracts affects the possibility of collusion in a repeated price-setting game. Contracts can both help and hinder collusion, because they reduce the size of the spot market, cutting both the immediate gain from defection and the punishment for deviation. Firms can always sustain some collusive price above marginal cost if they sell the right number of contracts, of any duration, whatever their discount factor. As the duration of contracts increases, however, collusion becomes harder to sustain.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 28 (2010)
Issue (Month): 1 (January)
Pages: 21-29

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Handle: RePEc:eee:indorg:v:28:y:2010:i:1:p:21-29

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Web page: http://www.elsevier.com/locate/inca/505551

Related research

Keywords: Long-term contracts Collusion Competition in prices;

References

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  1. Matti Liski & Juan-Pablo Montero, 2005. "Forward trading and collusion in oligopoly," Working Papers 0506, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
  2. Ferreira, Jose Luis, 2003. "Strategic interaction between futures and spot markets," Journal of Economic Theory, Elsevier, vol. 108(1), pages 141-151, January.
  3. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
  4. Mahenc, P. & Salanie, F., 2004. "Softening competition through forward trading," Journal of Economic Theory, Elsevier, vol. 116(2), pages 282-293, June.
  5. Margaret E. Slade & Henry Thille, 2006. "Commodity Spot Prices: An Exploratory Assessment of Market Structure and Forward-Trading Effects," Economica, London School of Economics and Political Science, vol. 73(290), pages 229-256, 05.
  6. Allaz Blaise & Vila Jean-Luc, 1993. "Cournot Competition, Forward Markets and Efficiency," Journal of Economic Theory, Elsevier, vol. 59(1), pages 1-16, February.
  7. Abreu, Dilip, 1986. "Extremal equilibria of oligopolistic supergames," Journal of Economic Theory, Elsevier, vol. 39(1), pages 191-225, June.
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Citations

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Cited by:
  1. de Frutos, Maria-Angeles & Fabra, Natalia, 2008. "On the Impact of Forward Contract Obligations in Multi-Unit Auctions," CEPR Discussion Papers 6756, C.E.P.R. Discussion Papers.
  2. James Bushnell, 2007. "Oligopoly equilibria in electricity contract markets," Journal of Regulatory Economics, Springer, vol. 32(3), pages 225-245, December.
  3. Russell Pittman & Vanessa Yanhua Zhang, 2008. "Electricity Restructuring in China: The Elusive Quest for Competition," EAG Discussions Papers 200805, Department of Justice, Antitrust Division.
  4. de Frutos, María-Ángeles & Fabra, Natalia, 2012. "How to allocate forward contracts: The case of electricity markets," European Economic Review, Elsevier, vol. 56(3), pages 451-469.
  5. Christian Redl & Derek Bunn, 2013. "Determinants of the premium in forward contracts," Journal of Regulatory Economics, Springer, vol. 43(1), pages 90-111, January.
  6. Paulo Cesar Coutinho & Andre Rossi de Oliveira, 2013. "Trading Forward in the Brazilian Electricity Market," International Journal of Energy Economics and Policy, Econjournals, vol. 3(3), pages 272-287.
  7. Baldursson , Fridrik M. & von der Fehr, Nils-Henrik, 2007. "Vertical Integration and Long-Term Contracts in Risky Markets," Memorandum 01/2007, Oslo University, Department of Economics.

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