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The Role of Observability in Futures Markets

Author Info

  • 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.

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Article provided by De Gruyter in its journal The B.E. Journal of Theoretical Economics.

Volume (Year): 6 (2006)
Issue (Month): 1 (June)
Pages: 1-22

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Handle: RePEc:bpj:bejtec:v:topics.6:y:2006:i:1:n:7
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Find related papers by 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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  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.
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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. repec:dgr:kubcen:2012088 is not listed on IDEAS
  3. Holmberg, P. & Willems, Bert, 2012. "Relaxing Competition through Speculation : Committing to a Negative Supply Slope," Discussion Paper 2012-039, Tilburg University, Tilburg Law and Economic Center.
  4. repec:dgr:kubtil:2012039 is not listed on IDEAS
  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. Le Coq, Chloé & Orzen, Henrik, 2002. "Do Forward Markets Enhance Competition? Experimental Evidence," SSE/EFI Working Paper Series in Economics and Finance 506, Stockholm School of Economics, revised 01 Oct 2004.

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