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Relaxing Competition through Speculation: Committing to a Negative Supply Slope

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  • Holmberg, P.
  • Willems, Bert

    (Tilburg University, Tilburg Law and Economics Center)

Abstract

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.

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Bibliographic Info

Paper provided by Tilburg University, Tilburg Law and Economic Center in its series Discussion Paper with number 2012-039.

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Date of creation: 2012
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Handle: RePEc:dgr:kubtil:2012039

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Web page: https://www.tilburguniversity.edu/research/institutes-and-research-groups/center-ar/

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

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