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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. Ferreira, Jose Luis, 2003. "Strategic interaction between futures and spot markets," Journal of Economic Theory, Elsevier, Elsevier, vol. 108(1), pages 141-151, January.
  2. Joshua S. Gans & Danny Price & Kim Woods, 1998. "Contracts and Electricity Pool Prices," Australian Journal of Management, Australian School of Business, Australian School of Business, vol. 23(1), pages 83-96, June.
  3. James B. Bushnell & Erin T. Mansur & Celeste Saravia, 2008. "Vertical Arrangements, Market Structure, and Competition: An Analysis of Restructured US Electricity Markets," American Economic Review, American Economic Association, American Economic Association, vol. 98(1), pages 237-66, March.
  4. 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, Springer, vol. 4(1), pages 41-65, January.
  5. Allaz, Blaise, 1992. "Oligopoly, uncertainty and strategic forward transactions," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 10(2), pages 297-308, June.
  6. Drew Fudenberg & David Levine, 1981. "Perfect Equilibria of Finite and Infinite Horizon Games," UCLA Economics Working Papers, UCLA Department of Economics 216, UCLA Department of Economics.
  7. 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.
  8. Dilger, Alexander, 1998. "The absent-minded prisoner," Wirtschaftswissenschaftliche Diskussionspapiere 14/1998, Ernst Moritz Arndt University of Greifswald, Faculty of Law and Economics.
  9. Steffen Huck & Hans-Theo Normann & Jörg Oechssler, 2001. "Two are Few and Four are Many: Number Effects in Experimental Oligopolies," Bonn Econ Discussion Papers, University of Bonn, Germany bgse12_2001, University of Bonn, Germany.
  10. Le Coq, Chloé & Orzen, Henrik, 2002. "Do Forward Markets Enhance Competition? Experimental Evidence," Working Paper Series in Economics and Finance 506, Stockholm School of Economics, revised 01 Oct 2004.
  11. Mahenc, P. & Salanie, F., 2004. "Softening competition through forward trading," Journal of Economic Theory, Elsevier, Elsevier, vol. 116(2), pages 282-293, June.
  12. Allaz Blaise & Vila Jean-Luc, 1993. "Cournot Competition, Forward Markets and Efficiency," Journal of Economic Theory, Elsevier, Elsevier, vol. 59(1), pages 1-16, February.
  13. 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.
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Cited by:
  1. Breitmoser, Yves, 2012. "Allaz-Vila competition with non-linear costs or demands," MPRA Paper 41772, University Library of Munich, Germany.
  2. Andrea Petrella & Sandro Sapio, 2010. "No PUN intended: A time series analysis of the Italian day-ahead electricity prices," RSCAS Working Papers, European University Institute 2010/03, European University Institute.
  3. 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, School of Economics, The University of New South Wales 2012-36, School of Economics, The University of New South Wales.

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