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Exclusion through speculation

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  • Cédric Argenton
  • Bert Willems

Abstract

Many commodities are traded on both a spot market and a derivative market. We show that an incumbent producer may use purely financial derivatives to extract rent from a potential entrant. It can do so by selling derivatives to a large buyer for more than his expected production level. This exclusionary scheme comes at the cost of inefficiently deterring entry and creating too much risk for the buyer. We further show that it can still be used when contracts are offered anonymously through a broker, as the incumbent can signal its identity by adjusting the contracting terms.

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Bibliographic Info

Paper provided by European University Institute in its series RSCAS Working Papers with number 2011/63.

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Date of creation: 12 Feb 2011
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Handle: RePEc:rsc:rsceui:2011/63

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Keywords: exclusion; monopolization; contracts; financial contracts; derivatives; risk aversion; speculation;

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Cited by:
  1. Holmberg, P. & Willems, B., 2012. "Relaxing competition through speculation: Committing to a negative supply slope," Cambridge Working Papers in Economics 1252, Faculty of Economics, University of Cambridge.

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