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Speculative storage in imperfectly competitive markets

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  • Mitraille, Sébastien
  • Thille, Henry

Abstract

Markets for many commodities are characterized by imperfectly competitive production as well as substantial storage by speculators who are attracted by significant price volatility. We examine how speculative storage affects the behavior of an oligopoly producing a commodity for which demand is subject to random shocks. Speculators compete with consumers when purchasing the commodity and then subsequently compete with producers when selling their stocks, resulting in two opposing incentives: on the one hand, producers would like to increase production to capture future sales in advance by selling to speculators; while on the other hand, they would like to withhold production to deter speculation, thereby eliminating the additional supply from speculators in future periods. We find that the incentive to sell to speculators can be quite strong, potentially resulting in prices sufficiently high to drive consumers from the market. Furthermore, these incentives are non-monotonic in the number of producers: speculative storage occurs more frequently in a relatively concentrated oligopoly than in the extremes of monopoly or perfect competition.

Suggested Citation

  • Mitraille, Sébastien & Thille, Henry, 2014. "Speculative storage in imperfectly competitive markets," International Journal of Industrial Organization, Elsevier, vol. 35(C), pages 44-59.
  • Handle: RePEc:eee:indorg:v:35:y:2014:i:c:p:44-59
    DOI: 10.1016/j.ijindorg.2014.07.001
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    Cited by:

    1. Sebastien Mitraille & Henry Thille, 2015. "Speculative Constraints on Oligopoly," Working Papers 1505, University of Guelph, Department of Economics and Finance.
    2. Sebastien Mitraille & Henry Thille, 2017. "Strategic advance sales, demand uncertainty and overcommitment," Working Papers 1708, University of Guelph, Department of Economics and Finance.
    3. Antoniou, Fabio & Fiocco, Raffaele, 2020. "Storable good market with intertemporal cost variations," MPRA Paper 97948, University Library of Munich, Germany.

    More about this item

    Keywords

    Inventories; Cournot oligopoly; Speculation;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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