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The length of contracts and collusion

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  • Green, Richard
  • Le Coq, Chloé

Abstract

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.

Suggested Citation

  • Green, Richard & Le Coq, Chloé, 2010. "The length of contracts and collusion," International Journal of Industrial Organization, Elsevier, vol. 28(1), pages 21-29, January.
    • Handle: RePEc:eee:indorg:v:28:y:2010:i:1:p:21-29
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Wölfing, Nikolas, 2019. "Forward trading and collusion in supply functions," ZEW Discussion Papers 19-003, ZEW - Leibniz Centre for European Economic Research.
    2. 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.
    3. James Bushnell, 2007. "Oligopoly equilibria in electricity contract markets," Journal of Regulatory Economics, Springer, vol. 32(3), pages 225-245, December.
    4. 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.
    5. Fiuza de Bragança, Gabriel Godofredo & Daglish, Toby, 2016. "Can market power in the electricity spot market translate into market power in the hedge market?," Energy Economics, Elsevier, vol. 58(C), pages 11-26.
    6. Xinyu Hua & Kathryn E. Spier, 2021. "Settling Lawsuits with Pirates," HKUST CEP Working Papers Series 202104, HKUST Center for Economic Policy.
    7. Aichele, Markus F., 2012. "Forward trading and collusion of firms in volatile markets," VfS Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62029, Verein für Socialpolitik / German Economic Association.
    8. Russell Pittman & Vanessa Yanhua Zhang, 2010. "Electricity Restructuring In China: How Competitive Will Generation Markets Be?," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 55(02), pages 377-400.
    9. Aichele, Markus, 2013. "Abuse of forward contracts to semi-collude in volatile markets," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79755, Verein für Socialpolitik / German Economic Association.
    10. Russell Pittman & Vanessa Yanhua Zhang, 2008. "Electricity Restructuring in China: The Elusive Quest for Competition," EAG Discussions Papers 200805, Department of Justice, Antitrust Division.
    11. Baldursson , Fridrik M. & von der Fehr, Nils-Henrik, 2007. "Vertical Integration and Long-Term Contracts in Risky Markets," Memorandum 01/2007, Oslo University, Department of Economics.
    12. Paulo Cesar Coutinho & Andre Rossi de Oliveira, 2013. "Trading Forward in the Brazilian Electricity Market," International Journal of Energy Economics and Policy, Econjournals, vol. 3(3), pages 272-287.
    13. Jesús M. López-Lezama & David Tobón-Orozco & Esteban Velilla & Jorge Barrientos & Fernando Villada, 2018. "Long-term seasonal forwards in electricity generation markets: an application to Colombia," Revista Cuadernos de Economia, Universidad Nacional de Colombia, FCE, CID, vol. 37(74), pages 287-314, July.
    14. Petrella, Andrea & Sapio, Alessandro, 2012. "Assessing the impact of forward trading, retail liberalization, and white certificates on the Italian wholesale electricity prices," Energy Policy, Elsevier, vol. 40(C), pages 307-317.
    15. Aichele, Markus F., 2014. "Forward trading and collusion of firms in volatile markets," University of Tübingen Working Papers in Business and Economics 75, University of Tuebingen, Faculty of Economics and Social Sciences, School of Business and Economics.
    16. Chloé Le Coq & Sebastian Schwenen, 2020. "Financial contracts as coordination device," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 29(2), pages 241-259, April.
    17. Miguel Vazquez, 2012. "Analysis of the strategic use of forward contracting in electricity markets," RSCAS Working Papers 2012/13, European University Institute.
    18. de Frutos, María-Ángeles & Fabra, Natalia, 2012. "How to allocate forward contracts: The case of electricity markets," European Economic Review, Elsevier, vol. 56(3), pages 451-469.
    19. Andrea Petrella & Sandro Sapio, 2010. "No PUN intended: A time series analysis of the Italian day-ahead electricity prices," RSCAS Working Papers 2010/03, European University Institute.
    20. Fabra, Natalia & de Frutos, Maria-Angeles, 2008. "On the Impact of Forward Contract Obligations in Multi-Unit Auctions," CEPR Discussion Papers 6756, C.E.P.R. Discussion Papers.
    21. Di Cosmo, Valeria & Lynch, Muireann Á., 2016. "Competition and the single electricity market: Which lessons for Ireland?," Utilities Policy, Elsevier, vol. 41(C), pages 40-47.
    22. Christian Redl & Derek Bunn, 2013. "Determinants of the premium in forward contracts," Journal of Regulatory Economics, Springer, vol. 43(1), pages 90-111, January.
    23. Daron Acemoglu, Ali Kakhbod, and Asuman Ozdaglar, 2017. "Competition in Electricity Markets with Renewable Energy Sources," The Energy Journal, International Association for Energy Economics, vol. 0(KAPSARC S).
    24. Anne Neumann & Sophia Rüster & Christian von Hirschhausen, 2015. "Long-Term Contracts in the Natural Gas Industry: Literature Survey and Data on 426 Contracts (1965-2014)," Data Documentation 77, DIW Berlin, German Institute for Economic Research.
    25. Xinyu Hua & Kathryn E. Spier, 2023. "Settling Lawsuits With Pirates," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(2), pages 543-575, May.

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