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The strategic motive to sell forward: experimental evidence

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  • José Luis Ferreira
  • Praveen Kujal
  • Stephen Rassenti

Abstract

We test the strategic motive to sell forward in experimental Cournot duopoly and quadropoly environments with either a finite (exogenous close) or an infinite (endogenous close) number of forward markets. In the exogenous close case experienced subjects do not avail themselves of the forward markets and production mostly occurs in the spot market phase. In a forward market duopoly experienced subjects achieve nearly the monopoly output level. For the quadropoly output levels are more competitive and are near the Cournot Nash equilibrium. In both cases output produced is much less than the Allaz-Vila (1993) prediction. The results with inexperienced subjects, however, are in line with theory and as reported in Le-Coq and Orzen (2006). We implement the case of infinitely many forward periods using the endogenous close rule. In this case the results both for a forward market duopoly and quadropoly are much more competitive both with inexperienced and experienced subjects. Unlike the exogenous stopping rule, under the endogenous rule subjects sell forward in the forward markets and find it hard to coordinate their actions.

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Bibliographic Info

Paper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number we092616.

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Date of creation: Mar 2009
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Handle: RePEc:cte:werepe:we092616

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  1. Rassenti, Stephen J & Reynolds, Stanley S & Smith, Vernon L, 1994. "Cotenancy and Competition in an Experimental Auction Market for Natural Gas Pipeline Networks," Economic Theory, Springer, vol. 4(1), pages 41-65, January.
  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. Alexander Dilger, 2006. "The absent-minded prisoner," Spanish Economic Review, Springer, vol. 8(4), pages 301-315, December.
  4. Allaz, Blaise, 1992. "Oligopoly, uncertainty and strategic forward transactions," International Journal of Industrial Organization, Elsevier, vol. 10(2), pages 297-308, June.
  5. 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).
  6. Drew Fudenberg & David Levine, 1981. "Perfect Equilibria of Finite and Infinite Horizon Games," UCLA Economics Working Papers 216, UCLA Department of Economics.
  7. Mahenc, P. & Salanie, F., 2004. "Softening competition through forward trading," Journal of Economic Theory, Elsevier, vol. 116(2), pages 282-293, June.
  8. Steffen Huck & Hans-Theo Normann & Jörg Oechssler, 2001. "Two are Few and Four are Many: Number Effects in Experimental Oligopolies," Bonn Econ Discussion Papers bgse12_2001, University of Bonn, Germany.
  9. Allaz Blaise & Vila Jean-Luc, 1993. "Cournot Competition, Forward Markets and Efficiency," Journal of Economic Theory, Elsevier, vol. 59(1), pages 1-16, February.
  10. 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.
  11. 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.
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Cited by:
  1. Silvester van Koten & Andreas Ortmann, 2012. "Structural versus Behavioral Remedies in the Deregulation of Electricity Markets: An Experimental Investigation Guided by Theory and Policy Concerns," Discussion Papers 2012-36, School of Economics, The University of New South Wales.
  2. Andrea Petrella & Sandro Sapio, 2010. "No PUN intended: A time series analysis of the Italian day-ahead electricity prices," RSCAS Working Papers 2010/03, European University Institute.
  3. Breitmoser, Yves, 2012. "Allaz-Vila competition with non-linear costs or demands," MPRA Paper 41772, University Library of Munich, Germany.

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