Strategic use of forward contracts and capacity constraints
This paper analyzes the implications of forward markets under demand uncertainty when oligopolistic firms endogenously choose capacity levels. The paper shows that a forward market that occurs after the investment decision is committed does not increase social welfare if demand uncertainty is relatively small. This result is contradictory to Allaz and Vila (1993) findings that forward markets mitigate market power and enhance efficiency. However, a forward market improves social welfare if demand uncertainty is relatively large. The findings have important policy implications for capital-intensive industries where capacity expansion requires long lead time.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- 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.
- Jordi Brandts & Paul Pezanis-Christou & Arthur Schram, 2003.
"Competition with Forward Contracts: A Laboratory Analysis Motivated by Electricity Market Design,"
UFAE and IAE Working Papers
581.03, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
- Jordi Brandts & Paul Pezanis-Christou & Arthur Schram, 2008. "Competition with forward contracts: a laboratory analysis motivated by electricity market design," Economic Journal, Royal Economic Society, vol. 118(525), pages 192-214, 01.
- Jordi Brandts & Paul Pezanis-Christou & Arthur Schram, 2003. "Competition with Forward Contracts: A Laboratory Analysis Motivated by Electricity Market Design," Levine's Bibliography 666156000000000172, UCLA Department of Economics.
- Jordi Brandts & Paul Pezanis-Christou & Arthur Schram, 2003. "Competitions with Forward Contracts: A Laboratory Analysis Motivated by Electricity Market Design," Working Papers 66, Barcelona Graduate School of Economics.
- Green, Richard, 1999. "The Electricity Contract Market in England and Wales," Journal of Industrial Economics, Wiley Blackwell, vol. 47(1), pages 107-24, March.
- Laussel, Didier, 1992.
"Strategic Commercial Policy Revisited: A Supply-Function Equilibrium Model,"
American Economic Review,
American Economic Association, vol. 82(1), pages 84-99, March.
- Laussel, D., 1990. "Strategic Commercial Policy Revisited: A Supply Function Equilibrium Model," G.R.E.Q.A.M. 90a05, Universite Aix-Marseille III.
- Williams, Jeffrey, 1987. "Futures Markets: A Consequences of Risk Aversion or Transactions Costs?," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1000-1023, October.
- Matti Liski & Juan-Pablo Montero, 2005.
"Forward trading and collusion in oligopoly,"
0506, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
- Kyle Bagwell, 1992.
"Commitment and Observability in Games,"
1014, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Allaz, Blaise, 1992. "Oligopoly, uncertainty and strategic forward transactions," International Journal of Industrial Organization, Elsevier, vol. 10(2), pages 297-308, June.
- Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-77, November.
- Mahenc, P. & Salanie, F., 2004. "Softening competition through forward trading," Journal of Economic Theory, Elsevier, vol. 116(2), pages 282-293, June.
When requesting a correction, please mention this item's handle: RePEc:eee:indorg:v:30:y:2012:i:2:p:164-173. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If references are entirely missing, you can add them using this form.