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Forward Trading in Exhaustible-Resource Oligopoly

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  • Matti Liski
  • Juan-Pablo Montero

Abstract

We analyze oligopolistic exhaustible-resource depletion when ?rms can trade forward contracts on deliveries, a market structure prevalent in many resource commodity markets. We ?nd that this organization of trade has substantial implications for resource depletion. As ?rms’ interactions become in?nitely frequent, resource stocks become fully contracted and the symmetric oligopolistic equilibrium converges to the perfectly competitive Hotelling (1931) outcome. Asymmetries in stock holdings allow ?rms to partially escape the procompetitive effect of contracting: a large stock provides commitment to leave a fraction of the stock uncontracted. In contrast, a small stock provides commitment to sell early, during the most pro?table part of the equilibrium.

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Paper provided by Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research in its series Working Papers with number 0806.

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Date of creation: Jun 2008
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Handle: RePEc:mee:wpaper:0806

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