Durable Goods Monopoly and Forward Markets
AbstractThe existence of forward markets has long been explained by risk hedging behaviour. More recently, attention has focused on the Cournot competition rationale for the emergence of forward markets since the quantity of forward transactions can be used as strategic variable. However, an important facet of many forward markets that has typically been ignored in the literature is the durable nature of output (e.g. nickel and lead). We show that forward markets may optimally emerge as long as a monopolist sells any fraction of its durable output. In particular, the comparative static analysis shows that as the durability of the product increases or the fraction of output sold increases, the monopolist will optimally increase the number of forward contracts purchased due to an exacerbated commitment problem with buyers. Our analysis also provides another explanation for differences between the forward price and the expected future spot price of a commodity that does not rely on uncertainty or risk considerations.
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Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal International Journal of the Economics of Business.
Volume (Year): 9 (2002)
Issue (Month): 2 ()
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