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Increasing marginal costs are strategically beneficial in forward trading

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  • Breitmoser, Yves

Abstract

The possibility of forward trading has been shown to restore social efficiency in Cournot oligopolies if marginal costs are constant. The paper analyzes the more general case that marginal costs are non-decreasing. I show that increasing marginal costs diminish the “strategic substitutability” between firms’ quantities, i.e. firms react less to quantity changes of opponents, and that this prevents convergence to social efficiency. Thus, increasing marginal costs have a competition-reducing effect in forward trading, and this effect is so strong that equilibrium prices may even increase after cost reductions—when the cost curvature increases simultaneously. This also shows that competition by forward trading differs qualitatively from both Cournot and Bertrand competition.

Suggested Citation

  • Breitmoser, Yves, 2013. "Increasing marginal costs are strategically beneficial in forward trading," Economics Letters, Elsevier, vol. 119(2), pages 109-112.
  • Handle: RePEc:eee:ecolet:v:119:y:2013:i:2:p:109-112
    DOI: 10.1016/j.econlet.2013.01.030
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    References listed on IDEAS

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    1. Breitmoser, Yves, 2012. "On the endogeneity of Cournot, Bertrand, and Stackelberg competition in oligopolies," International Journal of Industrial Organization, Elsevier, vol. 30(1), pages 16-29.
    2. Allaz Blaise & Vila Jean-Luc, 1993. "Cournot Competition, Forward Markets and Efficiency," Journal of Economic Theory, Elsevier, vol. 59(1), pages 1-16, February.
    3. Powell, Andrew, 1993. "Trading Forward in an Imperfect Market: The Case of Electricity in Britain," Economic Journal, Royal Economic Society, vol. 103(417), pages 444-453, March.
    4. Ferreira, Jose Luis, 2003. "Strategic interaction between futures and spot markets," Journal of Economic Theory, Elsevier, vol. 108(1), pages 141-151, January.
    5. Mahenc, P. & Salanie, F., 2004. "Softening competition through forward trading," Journal of Economic Theory, Elsevier, vol. 116(2), pages 282-293, June.
    6. Liski, Matti & Montero, Juan-Pablo, 2006. "Forward trading and collusion in oligopoly," Journal of Economic Theory, Elsevier, vol. 131(1), pages 212-230, November.
    7. Allaz, Blaise, 1992. "Oligopoly, uncertainty and strategic forward transactions," International Journal of Industrial Organization, Elsevier, vol. 10(2), pages 297-308, June.
    8. James Bushnell, 2007. "Oligopoly equilibria in electricity contract markets," Journal of Regulatory Economics, Springer, vol. 32(3), pages 225-245, December.
    9. Thille, Henry, 2003. "Forward trading and storage in a Cournot duopoly," Journal of Economic Dynamics and Control, Elsevier, vol. 27(4), pages 651-665, February.
    10. Maskin, Eric & Tirole, Jean, 2001. "Markov Perfect Equilibrium: I. Observable Actions," Journal of Economic Theory, Elsevier, vol. 100(2), pages 191-219, October.
    11. 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. David P. Brown & Andrew Eckert, 2017. "Electricity market mergers with endogenous forward contracting," Journal of Regulatory Economics, Springer, vol. 51(3), pages 269-310, June.

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    More about this item

    Keywords

    Forward trading; Duopoly; Social efficiency; Cournot; Bertrand;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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