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Futures Markets and the Theory of the Firm under Price Uncertainty

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  • Gershon Feder
  • Richard E. Just
  • Andrew Schmitz

Abstract

This paper examines the behavior of a competitive firm under price uncertainty where a futures market exists for the commodity produced by the firm. Working with the Sandmo approach, we found that production decisions depend only on the futures market price and input costs; the subjective distribution of future spot price affects only the firm's involvement in futures trading. Conditions are then determined under which a firm will either hedge, speculate by buying futures contracts, or speculate by selling futures contracts. The results indicate that an important social benefit derived from the existence of a futures market is to eliminate output fluctuations due to variation in producers' subjective distributions of future spot price.

Suggested Citation

  • Gershon Feder & Richard E. Just & Andrew Schmitz, 1980. "Futures Markets and the Theory of the Firm under Price Uncertainty," The Quarterly Journal of Economics, Oxford University Press, vol. 94(2), pages 317-328.
  • Handle: RePEc:oup:qjecon:v:94:y:1980:i:2:p:317-328.
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