Strategic use of forward contracts and capacity constraints
AbstractThis paper analyzes the implications of forward markets under demand uncertainty when oligopolistic firms endogenously choose capacity levels. The paper shows that a forward market that occurs after the investment decision is committed does not increase social welfare if demand uncertainty is relatively small. This result is contradictory to Allaz and Vila (1993) findings that forward markets mitigate market power and enhance efficiency. However, a forward market improves social welfare if demand uncertainty is relatively large. The findings have important policy implications for capital-intensive industries where capacity expansion requires long lead time.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal International Journal of Industrial Organization.
Volume (Year): 30 (2012)
Issue (Month): 2 ()
Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/505551
Capacity constraints; Market power; Forward market; Spot market;
Find related papers by JEL classification:
- L00 - Industrial Organization - - General - - - General
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ferreira José Luis, 2006.
"The Role of Observability in Futures Markets,"
The B.E. Journal of Theoretical Economics,
De Gruyter, vol. 6(1), pages 1-22, June.
- Mahenc, P. & Salanie, F., 2004. "Softening competition through forward trading," Journal of Economic Theory, Elsevier, vol. 116(2), pages 282-293, June.
- Matti Liski & Juan-Pablo Montero, 2004.
"Forward trading and collusion in oligopoly,"
0412, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
- Jordi Brandts & Paul Pezanis-Christou & Arthur Schram, 2003.
"Competition with Forward Contracts: A Laboratory Analysis Motivated by Electricity Market Design,"
UFAE and IAE Working Papers
581.03, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
- Jordi Brandts & Paul Pezanis-Christou & Arthur Schram, 2008. "Competition with forward contracts: a laboratory analysis motivated by electricity market design," Economic Journal, Royal Economic Society, vol. 118(525), pages 192-214, 01.
- Jordi Brandts & Paul Pezanis-Christou & Arthur Schram, 2003. "Competition with Forward Contracts: A Laboratory Analysis Motivated by Electricity Market Design," Levine's Bibliography 666156000000000172, UCLA Department of Economics.
- Jordi Brandts & Paul Pezanis-Christou & Arthur Schram, 2003. "Competitions with Forward Contracts: A Laboratory Analysis Motivated by Electricity Market Design," Working Papers 66, Barcelona Graduate School of Economics.
- Kyle Bagwell, 1992.
"Commitment and Observability in Games,"
1014, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Laussel, Didier, 1992.
"Strategic Commercial Policy Revisited: A Supply-Function Equilibrium Model,"
American Economic Review,
American Economic Association, vol. 82(1), pages 84-99, March.
- Laussel, D., 1990. "Strategic Commercial Policy Revisited: A Supply Function Equilibrium Model," G.R.E.Q.A.M. 90a05, Universite Aix-Marseille III.
- Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-77, November.
- Green, Richard, 1999. "The Electricity Contract Market in England and Wales," Journal of Industrial Economics, Wiley Blackwell, vol. 47(1), pages 107-24, March.
- Williams, Jeffrey, 1987. "Futures Markets: A Consequences of Risk Aversion or Transactions Costs?," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1000-1023, October.
- 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.
- Allaz, Blaise, 1992. "Oligopoly, uncertainty and strategic forward transactions," International Journal of Industrial Organization, Elsevier, vol. 10(2), pages 297-308, June.
- Serra, Pablo, 2013. "Contract market power and its impact on the efficiency of the electricity sector," Energy Policy, Elsevier, vol. 61(C), pages 653-662.
- Aichele, Markus, 2013. "Abuse of forward contracts to semi-collude in volatile markets," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79755, Verein für Socialpolitik / German Economic Association.
- Inderfurth, Karl & Kelle, Peter & Kleber, Rainer, 2013. "Dual sourcing using capacity reservation and spot market: Optimal procurement policy and heuristic parameter determination," European Journal of Operational Research, Elsevier, vol. 225(2), pages 298-309.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.