Do firms sell forward for strategic reasons? An application to the wholesale market for natural gas
AbstractBuilding 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 InfoPaper provided by IESE Business School in its series IESE Research Papers with number D/864.
Length: 42 pages
Date of creation: 05 Jun 2010
Date of revision:
market power; risk-hedging; forward contracts; spot market; over-thecounter trade; market transparency; churn rates;
Other versions of this item:
- Remco van Eijkel & José Luis Moraga Gonzalez, 2010. "Do Firms Sell Forward for Strategic Reasons? An Application to the Wholesale Market for Natural Gas," CESifo Working Paper Series 3270, CESifo Group Munich.
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-09-25 (All new papers)
- NEP-BEC-2010-09-25 (Business Economics)
- NEP-ENE-2010-09-25 (Energy Economics)
- NEP-RMG-2010-09-25 (Risk Management)
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