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The length of contracts and collusion

  • Green, Richard
  • Le Coq, Chloé

Many commodities (including energy, agricultural products and metals) are sold both on spot markets and through long-term contracts which commit the parties to exchange the commodity in each of a number of spot market periods. This paper shows how the length of contracts affects the possibility of collusion in a repeated price-setting game. Contracts can both help and hinder collusion, because they reduce the size of the spot market, cutting both the immediate gain from defection and the punishment for deviation. Firms can always sustain some collusive price above marginal cost if they sell the right number of contracts, of any duration, whatever their discount factor. As the duration of contracts increases, however, collusion becomes harder to sustain.

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File URL: http://www.sciencedirect.com/science/article/B6V8P-4W9XDRV-1/2/a500e2cf47662a03df41c5e12f7cd9dc
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Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 28 (2010)
Issue (Month): 1 (January)
Pages: 21-29

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Handle: RePEc:eee:indorg:v:28:y:2010:i:1:p:21-29
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505551

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  1. Matti Liski & Juan-Pablo Montero, 2005. "Forward trading and collusion in oligopoly," Working Papers 0506, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
  2. Abreu, Dilip, 1986. "Extremal equilibria of oligopolistic supergames," Journal of Economic Theory, Elsevier, vol. 39(1), pages 191-225, June.
  3. Mahenc, P. & Salanie, F., 2004. "Softening competition through forward trading," Journal of Economic Theory, Elsevier, vol. 116(2), pages 282-293, June.
  4. Allaz Blaise & Vila Jean-Luc, 1993. "Cournot Competition, Forward Markets and Efficiency," Journal of Economic Theory, Elsevier, vol. 59(1), pages 1-16, February.
  5. Ferreira, Jose Luis, 2003. "Strategic interaction between futures and spot markets," Journal of Economic Theory, Elsevier, vol. 108(1), pages 141-151, January.
  6. Margaret E. Slade & Henry Thille, 2006. "Commodity Spot Prices: An Exploratory Assessment of Market Structure and Forward-Trading Effects," Economica, London School of Economics and Political Science, vol. 73(290), pages 229-256, 05.
  7. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, June.
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