Advanced Search
MyIDEAS: Login to save this paper or follow this series

Relaxing competition through speculation: Committing to a negative supply slope

Contents:

Author Info

  • Holmberg, P.
  • Willems, B.

Abstract

We demonstrate how suppliers can take strategic speculative positions in derivatives markets to soften competition in the spot market. In our game, suppliers first choose a portfolio of call options and then compete with supply functions. In equilibrium firms sell forward contracts and buy call options to commit to downward sloping supply functions. Although this strategy is risky, it reduces the elasticity of the residual demand of competitors, who increase their mark-ups in response. We show that this type of strategic speculation increases the level and volatility of commodity prices and decreases welfare.

Download Info

If 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.
File URL: http://www.econ.cam.ac.uk/research/repec/cam/pdf/cwpe1252.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 1252.

as in new window
Length:
Date of creation: 19 Dec 2012
Date of revision:
Handle: RePEc:cam:camdae:1252

Contact details of provider:
Web page: http://www.econ.cam.ac.uk/index.htm

Related research

Keywords: Supply function equilibrium; Option contracts; Strategic commitment;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
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.:
as in new window
  1. Argenton, C. & Willems, Bert, 2010. "Exclusion Through Speculation," Discussion Paper, Tilburg University, Center for Economic Research 2010-83, Tilburg University, Center for Economic Research.
  2. Holmberg, Pär & Newbery, David, 2010. "The supply function equilibrium and its policy implications for wholesale electricity auctions," Utilities Policy, Elsevier, Elsevier, vol. 18(4), pages 209-226, December.
  3. 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, Royal Economic Society, vol. 118(525), pages 192-214, 01.
  4. Ramteen Sioshansi & Shmuel Oren, 2007. "How good are supply function equilibrium models: an empirical analysis of the ERCOT balancing market," Journal of Regulatory Economics, Springer, Springer, vol. 31(1), pages 1-35, February.
  5. James B. Bushnell & Erin T. Mansur & Celeste Saravia, 2007. "Vertical Arrangements, Market Structure, and Competition An Analysis of Restructured U.S. Electricity Markets," NBER Working Papers 13507, National Bureau of Economic Research, Inc.
  6. Hendrik Bessembinder & Michael L. Lemmon, 2002. "Equilibrium Pricing and Optimal Hedging in Electricity Forward Markets," Journal of Finance, American Finance Association, American Finance Association, vol. 57(3), pages 1347-1382, 06.
  7. Frank Wolak, 2000. "An Empirical Analysis of the Impact of Hedge Contracts on Bidding Behavior in a Competitive Electricity Market," International Economic Journal, Taylor & Francis Journals, Taylor & Francis Journals, vol. 14(2), pages 1-39.
  8. Stein, Jeremy C, 1987. "Informational Externalities and Welfare-Reducing Speculation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 95(6), pages 1123-45, December.
  9. Leonard Cheng, 1985. "Comparing Bertrand and Cournot Equilibria: A Geometric Approach," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 146-152, Spring.
  10. Holmberg, Pär & Newbery, David & Ralph, Daniel, 2009. "Supply Function Equilibria: Step Functions and Continuous Representations," Working Paper Series, Research Institute of Industrial Economics 788, Research Institute of Industrial Economics.
  11. Ali Hortaçsu & Steven L. Puller, 2008. "Understanding strategic bidding in multi-unit auctions: a case study of the Texas electricity spot market," RAND Journal of Economics, RAND Corporation, vol. 39(1), pages 86-114.
  12. Hughes, John S. & Kao, Jennifer L., 1997. "Strategic forward contracting and observability," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 16(1), pages 121-133, November.
  13. Cox, Charles C, 1976. "Futures Trading and Market Information," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 84(6), pages 1215-37, December.
  14. P�r Holmberg, 2011. "Strategic Forward Contracting in the Wholesale Electricity Market," The Energy Journal, International Association for Energy Economics, International Association for Energy Economics, vol. 0(Number 1), pages 169-202.
  15. Bernheim, B. Douglas & Peleg, Bezalel & Whinston, Michael D., 1987. "Coalition-Proof Nash Equilibria I. Concepts," Journal of Economic Theory, Elsevier, Elsevier, vol. 42(1), pages 1-12, June.
  16. Ferreira, Jose Luis, 2003. "Strategic interaction between futures and spot markets," Journal of Economic Theory, Elsevier, Elsevier, vol. 108(1), pages 141-151, January.
  17. José Luis Ferreira, 2001. "The Role Of Observability In Futures Markets," Economics Working Papers we015316, Universidad Carlos III, Departamento de Economía.
  18. Holmberg, Pär, 2009. "Supply Function Equilibria of Pay-as-Bid Auctions," Working Paper Series, Research Institute of Industrial Economics 787, Research Institute of Industrial Economics.
  19. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
  20. Willems, Bert & Rumiantseva, I. & Weigt, H., 2007. "Cournot versus Supply Functions: What Does the Data tell us?," Discussion Paper, Tilburg University, Tilburg Law and Economic Center 2007-023, Tilburg University, Tilburg Law and Economic Center.
  21. Hart, Oliver D & Kreps, David M, 1986. "Price Destabilizing Speculation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(5), pages 927-52, October.
  22. Green, Richard, 1999. "The Electricity Contract Market in England and Wales," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 47(1), pages 107-24, March.
  23. de Frutos, María-Ángeles & Fabra, Natalia, 2012. "How to allocate forward contracts: The case of electricity markets," European Economic Review, Elsevier, Elsevier, vol. 56(3), pages 451-469.
  24. Turnovsky, Stephen J, 1983. "The Determination of Spot and Futures Prices with Storable Commodities," Econometrica, Econometric Society, Econometric Society, vol. 51(5), pages 1363-87, September.
  25. Oren, Shmuel S., 2005. "Generation Adequacy via Call Options Obligations: Safe Passage to the Promised Land," The Electricity Journal, Elsevier, Elsevier, vol. 18(9), pages 28-42, November.
  26. Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, Econometric Society, vol. 57(6), pages 1243-77, November.
  27. Figlewski, Stephen, 1981. "The Informational Effects of Restrictions on Short Sales: Some Empirical Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 16(04), pages 463-476, November.
  28. Green, Richard J & Newbery, David M, 1992. "Competition in the British Electricity Spot Market," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 100(5), pages 929-53, October.
  29. Von Der Fehr, N.H.M. & Harbord, D., 1992. "Long-Tern Contracts and Imperfectly Competitive Spot Markets : A Study of U.K. Electricity Industry," Memorandum, Oslo University, Department of Economics 14/1992, Oslo University, Department of Economics.
  30. Bernheim, B. Douglas & Whinston, Michael D., 1987. "Coalition-Proof Nash Equilibria II. Applications," Journal of Economic Theory, Elsevier, Elsevier, vol. 42(1), pages 13-29, June.
  31. Edward Anderson & Huifu Xu, 2006. "Optimal Supply Functions in Electricity Markets with Option Contracts and Non-smooth Costs," Computational Statistics, Springer, Springer, vol. 63(3), pages 387-411, July.
  32. Mahenc, P. & Salanie, F., 2004. "Softening competition through forward trading," Journal of Economic Theory, Elsevier, Elsevier, vol. 116(2), pages 282-293, June.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:cam:camdae:1252. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Howard Cobb).

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.