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The Impact of Forward Trading on Tacit Collusion: Experimental Evidence

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  • Schubert, Jens

Abstract

This article reports the results of a laboratory experiment that examines the strategic effect of forward contracts on market power in infinitely repeated duopolies. Two competing effects motivate the experimental design. Allaz and Vila (1993) argue that forward markets act like additional competitors in that they increase quantity competition among firms. Conversely, Liski and Montero (2006) argue that forward contracting can facilitate collusive outcomes by enabling firms to soften competition. The experiment provides a first simultaneous test of these rival effects. Contrary to previous experimental studies, the results do not support the quantity-competition effect. Further, the findings provide evidence in support of the collusive hypothesis.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 43768.

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Date of creation: 01 Jan 2013
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Handle: RePEc:pra:mprapa:43768

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Keywords: Cournot oligopoly; Collusion; Experiments; Forward markets; Electricity markets;

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  1. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, Springer, vol. 10(2), pages 171-178, June.
  2. Mahenc, P. & Salanie, F., 2004. "Softening competition through forward trading," Journal of Economic Theory, Elsevier, Elsevier, vol. 116(2), pages 282-293, June.
  3. José Luis Ferreira & Praveen Kujal & Stephen Rassenti, 2010. "Multiple openings of forward markets: experimental evidence," Economics Working Papers we1023, Universidad Carlos III, Departamento de Economía.
  4. Jordi Brandts & Paul Pezanis-Christou & Arthur Schram, 2003. "Competition with Forward Contracts: A Laboratory Analysis Motivated by Electricity Market Design," UFAE and IAE Working Papers, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) 581.03, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  5. Le Coq, Chloe & Orzen, Henrik, 2006. "Do forward markets enhance competition?: Experimental evidence," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 61(3), pages 415-431, November.
  6. Silvester van Koten & Andreas Ortmann, 2011. "Structural versus Behavioral Measures in the Deregulation of Electricity Markets: An Experimental Investigation Guided by Theory and Policy Concerns," RSCAS Working Papers, European University Institute 2011/07, European University Institute.
  7. Matti Liski & Juan-Pablo Montero, 2004. "Forward trading and collusion in oligopoly," Working Papers, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research 0412, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
  8. Ferreira, Jose Luis, 2003. "Strategic interaction between futures and spot markets," Journal of Economic Theory, Elsevier, Elsevier, vol. 108(1), pages 141-151, January.
  9. Friedman, James W, 1971. "A Non-cooperative Equilibrium for Supergames," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 38(113), pages 1-12, January.
  10. Steffen Huck & Hans-Theo Normann & Joerg Oechssler, 1997. "Learning in Cournot Oligopoly - An Experiment," Game Theory and Information, EconWPA 9707009, EconWPA, revised 22 Jul 1997.
  11. Christoph Engel, 2006. "How Much Collusion. A Meta-Analysis On Oligopoly Experiments," Working Paper Series of the Max Planck Institute for Research on Collective Goods, Max Planck Institute for Research on Collective Goods 2006_27, Max Planck Institute for Research on Collective Goods.
  12. Bushnell, James, 2007. "Oligopoly Equilibria in Electricity Contract Markets," Staff General Research Papers 13135, Iowa State University, Department of Economics.
  13. Hans-Theo Normann & Brian Wallace, 2012. "The impact of the termination rule on cooperation in a prisoner’s dilemma experiment," International Journal of Game Theory, Springer, Springer, vol. 41(3), pages 707-718, August.
  14. Allaz, Blaise, 1992. "Oligopoly, uncertainty and strategic forward transactions," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 10(2), pages 297-308, June.
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