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Forward Trading in Exhaustible-Resource Oligopoly

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Author Info
Matti Liski
Juan-Pablo Montero

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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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  1. A. Denny Ellerman & Juan-Pablo Montero, 2005. "The Efficiency and Robustness of Allowance Banking in the U.S. Acid Rain Program," Working Papers 0505, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research. [Downloadable!]
  2. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June. [Downloadable!] (restricted)
  3. Allaz Blaise & Vila Jean-Luc, 1993. "Cournot Competition, Forward Markets and Efficiency," Journal of Economic Theory, Elsevier, vol. 59(1), pages 1-16, February. [Downloadable!] (restricted)
  4. Loury, Glenn C, 1986. "A Theory of 'Oil'igopoly: Cournot Equilibrium in Exhaustible Resource Markets with Fixed Supplies," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(2), pages 285-301, June. [Downloadable!] (restricted)
  5. James B. Bushnell & Erin T. Mansur & Celeste Saravia, 2008. "Vertical Arrangements, Market Structure, and Competition: An Analysis of Restructured US Electricity Markets," American Economic Review, American Economic Association, vol. 98(1), pages 237-66, March. [Downloadable!]
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  6. Salo, Seppo & Tahvonen, Olli, 2001. "Oligopoly equilibria in nonrenewable resource markets," Journal of Economic Dynamics and Control, Elsevier, vol. 25(5), pages 671-702, May. [Downloadable!] (restricted)
  7. Salant, Stephen W, 1976. "Exhaustible Resources and Industrial Structure: A Nash-Cournot Approach to the World Oil Market," Journal of Political Economy, University of Chicago Press, vol. 84(5), pages 1079-93, October. [Downloadable!] (restricted)
  8. Gérard Gaudet, 2007. "Natural resource economics under the rule of Hotelling," Canadian Journal of Economics, Canadian Economics Association, vol. 40(4), pages 1033-1059, November. [Downloadable!] (restricted)
  9. Mahenc, P. & Salanie, F., 2004. "Softening competition through forward trading," Journal of Economic Theory, Elsevier, vol. 116(2), pages 282-293, June. [Downloadable!] (restricted)
  10. Dudey, Marc, 1992. "Dynamic Edgeworth-Bertrand Competition," The Quarterly Journal of Economics, MIT Press, vol. 107(4), pages 1461-77, November. [Downloadable!] (restricted)
  11. Liski, Matti & Montero, Juan-Pablo, 2006. "Forward trading and collusion in oligopoly," Journal of Economic Theory, Elsevier, vol. 131(1), pages 212-230, November. [Downloadable!] (restricted)
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