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Monopoly Behaviour with Speculative Storage

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  • Sebastien Mitraille

    (Toulouse Business School)

  • Henry Thille

    ()
    (University of Guelph)

Abstract

We analyze the effects of competitive storage when the production of the good is controlled by a monopolist. The existence of competitive storers serves to reduce the monopolist’s effective demand when speculators are selling and to increase it when they are buying. This results in the monopolist manipulating the frequency of stock-outs, and hence, the price-smoothing effects of competitive storage. We use a two-period model to show that there is a lower probability of a stock-out under a monopolist than in a perfectly competitive market. We find that there exist states of the world in which the monopolist prices higher on average than what would occur in the absence of speculators. We then extend the model to an infinite horizon to examine the implications for price volatility using collocation methods to approximate both the expected future price and the expected value function. We confirm that stock-outs occur less frequently under the monopolist, even though price is more volatile. We also demonstrate that while free entry by speculators does reduce the gap in price volatility, it does not remove it.

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Bibliographic Info

Paper provided by University of Guelph, Department of Economics and Finance in its series Working Papers with number 0804.

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Length: 33 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:gue:guelph:2008-4

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  1. Williams,Jeffrey C. & Wright,Brian D., 1991. "Storage and Commodity Markets," Cambridge Books, Cambridge University Press, number 9780521326162, Fall.
  2. Deaton, Angus & Laroque, Guy, 1992. "On the Behaviour of Commodity Prices," Review of Economic Studies, Wiley Blackwell, vol. 59(1), pages 1-23, January.
  3. Anderson, Ronald W & Gilbert, Christopher L, 1988. "Commodity Agreements and Commodity Markets: Lessons from Tin," Economic Journal, Royal Economic Society, vol. 98(389), pages 1-15, March.
  4. Newbery, David M, 1989. "The Theory of Food Price Stabilisation," Economic Journal, Royal Economic Society, vol. 99(398), pages 1065-82, December.
  5. McLaren, J., 1992. "Speculation on Primary Commodities: The Effects of Restricted Entry," Discussion Papers 1992_37, Columbia University, Department of Economics.
  6. Miranda, Mario J, 1998. "Numerical Strategies for Solving the Nonlinear Rational Expectations Commodity Market Model," Computational Economics, Society for Computational Economics, vol. 11(1-2), pages 71-87, April.
  7. Scheinkman, Jose A & Schechtman, Jack, 1983. "A Simple Competitive Model with Production and Storage," Review of Economic Studies, Wiley Blackwell, vol. 50(3), pages 427-41, July.
  8. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, December.
  9. Thille, Henry, 2006. "Inventories, market structure, and price volatility," Journal of Economic Dynamics and Control, Elsevier, vol. 30(7), pages 1081-1104, July.
  10. Newbery, David M, 1984. "Commodity Price Stabilization in Imperfect or Cartelized Markets," Econometrica, Econometric Society, vol. 52(3), pages 563-78, May.
  11. Deaton, Angus & Laroque, Guy, 1996. "Competitive Storage and Commodity Price Dynamics," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 896-923, October.
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Cited by:
  1. Assa, Hirbod & Dabbous, Amal & Gospodinov, Nikolay, 2013. "A staggered pricing approach to modeling speculative storage: implications for commodity price dynamics," Working Paper 2013-08, Federal Reserve Bank of Atlanta.
  2. Martin Stürmer, 2013. "150 Years of Boom and Bust: What Drives Mineral Commodity Prices?," 2013 Papers pst529, Job Market Papers.

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