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Do firms sell forward for strategic reasons? An application to the wholesale market for natural gas

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Author Info

  • van Eijkel, Remco

    (University of Groningen)

  • Moraga-González, Jose L.

    ()
    (IESE Business School)

Abstract

Building on a model of the interaction of risk-averse firms that compete in forward and spot markets, we develop an empirical strategy to test whether oligopolistic firms use forward contracts for strategic motives, for risk-hedging, or for both. An increase in the number of players weakens the incentives to sell forward for risk-hedging reasons. However, if strategic motives are also relevant, then an increase in the number of players strengthens the incentives to sell forward. This difference provides the analyst with a way to identify whether strategic considerations are important at motivating firms to sell forward. Using data from the Dutch wholesale market for natural gas, where we observe the number of players, spot and forward sales, and churn rates, we find evidence that strategic reasons play an important role in explaining the observed firms' (inverse) hedge ratios. The data also lend support to the existence of a learning effect by wholesalers.

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Bibliographic Info

Paper provided by IESE Business School in its series IESE Research Papers with number D/864.

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Length: 42 pages
Date of creation: 05 Jun 2010
Date of revision:
Handle: RePEc:ebg:iesewp:d-0864

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Postal: IESE Business School, Av Pearson 21, 08034 Barcelona, SPAIN
Web page: http://www.iese.edu/
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Related research

Keywords: market power; risk-hedging; forward contracts; spot market; over-thecounter trade; market transparency; churn rates;

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  1. van Damme, Eric & Hurkens, Sjaak, 1997. "Games with Imperfectly Observable Commitment," Games and Economic Behavior, Elsevier, vol. 21(1-2), pages 282-308, October.
  2. von der Fehr, Nils-Henrik M. & Hansen, Petter Vegard, 2008. "Electricity Retailing in Norway," Memorandum 02/2009, Oslo University, Department of Economics.
  3. 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 14/1992, Oslo University, Department of Economics.
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Cited by:
  1. Silvester Van Koten & Andreas Ortmann, 2011. "Structural versus Behavioral Remedies in the Deregulation of Electricity Markets: An Experimental Investigation Guided by Theory and Policy Concerns," CERGE-EI Working Papers wp437, The Center for Economic Research and Graduate Education - Economic Institute, Prague.

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