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Two-Period Duopolies with Forward Markets

Author

Listed:
  • Caleb Cox

    (Virginia Commonwealth University)

  • Arzé Karam

    (Durham University)

  • Matthias Pelster

    (Paderborn University)

Abstract

We experimentally consider a dynamic multi-period Cournot duopoly with a simultaneous option to manage financial risk and a real option to delay supply. The first option allows players to manage risk before uncertainty is realized, while the second allows managing risk after realization. In our setting, firms face a strategic dilemma: They must weigh the advantages of dealing with risk exposure against the disadvantages of higher competition. In theory, firms make strategic use of the hedging component, enhancing competition. Our experimental results support this theory, suggesting that hedging increases competition and negates duopoly profits even in a simultaneous setting.

Suggested Citation

  • Caleb Cox & Arzé Karam & Matthias Pelster, 2022. "Two-Period Duopolies with Forward Markets," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 60(1), pages 29-62, February.
    • Handle: RePEc:kap:revind:v:60:y:2022:i:1:d:10.1007_s11151-021-09839-6
    DOI: 10.1007/s11151-021-09839-6
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    References listed on IDEAS

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    More about this item

    Keywords

    Corporate hedging; Duopoly; Dynamic setting; Game theory; Laboratory experiments; Strategic application;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets

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