Entry, Imperfect Competition, and Futures Market for the Input
AbstractWe analyze firms’ entry, production and hedging decisions under imperfect competition. We consider an oligopoly industry producing a homogeneous output in which risk-averse firms incur a sunk cost upon entering the industry, and then compete in Cournot with one another. Each firm faces uncertainty in the input cost when making production decision, and has access to the futures market to hedge its random cost. We provide two sets of results. First, under general assumptions about risk preferences, demand, and uncertainty, we characterize the unique equilibrium. In contrast to previous results in the literature (without entry), production and output price depend on uncertainty and risk aversion. In other words, when entry is endogenized, access to the futures market does not lead to separation. Second, to study the effect of access to the futures markets on entry and production, we restrict attention to constant absolute risk aversion (CARA) preferences, a linear demand, and a normal distribution for the spot input price. In general, the effect of access to the futures market on the number of firms and production is ambiguous. However, when the values of the model parameters lead to partial hedging, the effect is unambiguous. Under partial hedging, access to the futures market induces more firms to enter the market and each one of them to produce more.
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Bibliographic InfoPaper provided by CIRPEE in its series Cahiers de recherche with number 1215.
Date of creation: 2012
Date of revision:
Cournot; Entry; Futures; Hedging; Imperfect competition;
Find related papers by JEL classification:
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- 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-2012-03-28 (All new papers)
- NEP-BEC-2012-03-28 (Business Economics)
- NEP-COM-2012-03-28 (Industrial Competition)
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