Strategic interaction between futures and spot markets
There is a literature (e.g., Allaz and Vila, 1992 and Hughes and Kao, 1997) showing that in an oligopolistic context, the presence of a futures market induces firms to use it in order to increase its market share. The consequence of this behavior is that the total quantity supplied by the industry increases, thus making the oligopolistic outcome closer to the competitive equilibrium. In the present work, we propose a model to study the interaction of spot and futures markets that does not imply this pro-competitive effect. The model is the same as in Allaz and Vila in the sense that firms have infinitely many moments to trade in the futures market before the spot market takes place. We analyze the equilibria in the infinite case directly and show that many equilibria emerge in a kind of folk-theorem result (but ours is not a repeated game). The equilibrium in which firms do not use the forward market is particularly robust as it satisfies the most demanding definition of renegotiation-proofuess. Furthermore, if firms are allowed to buy in the futures market, they can sustain the monopolistic outcome in a renegotiation-proof equilibrium (notice that there is only one period in the spot market). We also study the role of information in the model and argue that our results fit better stylized facts of some industries like the power market in the U.K.
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- Blaise Allaz & Jean-Luc Vila, 1993. "Cournot Competition, Forward Markets and Efficiency," Post-Print hal-00511806, HAL.
- Douglas Bernheim, B. & Ray, Debraj, 1989. "Collective dynamic consistency in repeated games," Games and Economic Behavior, Elsevier, vol. 1(4), pages 295-326, December.
- Farrell, Joseph & Maskin, Eric, 1987.
"Renegotiation in Repeated Games,"
Department of Economics, Working Paper Series
qt9wv3h5jb, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- 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.
- Evans, Robert & Maskin, Eric, 1989. "Efficient renegotiation--proof equilibria in repeated games," Games and Economic Behavior, Elsevier, vol. 1(4), pages 361-369, December.
- Ferreira, José Luis, 2000.
"Strategic interaction between futures and spot markets,"
UC3M Working papers. Economics
7273, Universidad Carlos III de Madrid. Departamento de Economía.
- Ferreira, Jose Luis, 2003. "Strategic interaction between futures and spot markets," Journal of Economic Theory, Elsevier, vol. 108(1), pages 141-151, January.
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