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The Role of Observability in Futures Markets

Author

Listed:
  • Ferreira José Luis

    () (Universidad Carlos III de Madrid)

Abstract

Allaz (1992) and Allaz and Vila (1993) show that in an oligopolistic industry the introduction of a futures market that operates prior to the spot market induces more competitive outcomes. Hughes and Kao (1997) show that this result presumes that firms' future positions are perfectly observed, and that when firms' positions are not observed the Cournot outcome arises. We study an alternative formulation of observability, where the behavior of participants in the futures market is explicitly analyzed, and show that this approach leads to different results. Imperfect observability induces more competitive outcomes than Allaz and Vila's model.

Suggested Citation

  • Ferreira José Luis, 2006. "The Role of Observability in Futures Markets," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 6(1), pages 1-22, June.
  • Handle: RePEc:bpj:bejtec:v:topics.6:y:2006:i:1:n:7
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    References listed on IDEAS

    as
    1. Ferreira, Jose Luis, 2003. "Strategic interaction between futures and spot markets," Journal of Economic Theory, Elsevier, vol. 108(1), pages 141-151, January.
    2. Hughes, John S. & Kao, Jennifer L., 1997. "Strategic forward contracting and observability," International Journal of Industrial Organization, Elsevier, vol. 16(1), pages 121-133, November.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Miguel Vazquez, 2012. "Analysis of the strategic use of forward contracting in electricity markets," RSCAS Working Papers 2012/13, European University Institute.
    2. Holmberg, Pär & Willems, Bert, 2015. "Relaxing competition through speculation: Committing to a negative supply slope," Journal of Economic Theory, Elsevier, vol. 159(PA), pages 236-266.
    3. ABADA, Ibrahim & EHRENMANN, Andreas & SMEERS, Yves, 2014. "Endogenizing long-term contracts in gas market models," CORE Discussion Papers 2014036, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    4. Le Coq, Chloe & Orzen, Henrik, 2006. "Do forward markets enhance competition?: Experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 61(3), pages 415-431, November.
    5. Adilov, Nodir, 2012. "Strategic use of forward contracts and capacity constraints," International Journal of Industrial Organization, Elsevier, vol. 30(2), pages 164-173.
    6. Pär Holmberg, 2011. "Strategic Forward Contracting in the Wholesale Electricity Market," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 169-202.
    7. Remco van Eijkel & Jose Luis Moraga, 2010. "Do Firms sell forward for Strategic Reasons? An Application to the Wholesale Market for Natural Gas," Tinbergen Institute Discussion Papers 10-058/1, Tinbergen Institute.
    8. Sebastien Mitraille & Henry Thille, 2017. "Strategic advance sales, demand uncertainty and overcommitment," Working Papers 1708, University of Guelph, Department of Economics and Finance.

    More about this item

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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