Do Forward Markets Enhance Competition? Experimental Evidence
AbstractHedging risks is an important rationale for the existence of forward markets. However, Allaz and Vila (1993) show that duopolists can also have a strategic motive to sell forward, irrespective of exogenous uncertainties. Moreover, in their model the possibility of forward trading increases competitiveness between the two firms, raising consumer surplus and welfare. In this study we analyze the case of an n firm oligopoly in Allaz’ and Vila’s framework and derive comparative static predictions with regard to the market institution and the number of competitors. We then test the theoretical hypotheses in a laboratory experiment. Our findings support the main comparative-static predictions of the model but also suggest that, when compared to the increase in competitive pressure due to entry, the competition-enhancing effect of a forward market is weaker than predicted.
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Bibliographic InfoPaper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 506.
Length: 38 pages
Date of creation: 22 Aug 2002
Date of revision: 01 Oct 2004
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Cournot Competition; Forward Markets; Spot Markets; Experiments;
Other versions of this item:
- Le Coq, Chloe & Orzen, Henrik, 2006. "Do forward markets enhance competition?: Experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 61(3), pages 415-431, November.
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2002-09-11 (All new papers)
- NEP-ENT-2002-08-29 (Entrepreneurship)
- NEP-EXP-2002-09-11 (Experimental Economics)
- NEP-FIN-2002-09-11 (Finance)
- NEP-MIC-2002-10-07 (Microeconomics)
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