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Forward Markets and Signals of Quality

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  • Mahenc, Philippe
  • Meunier, Valerie

Abstract

We analyze how information about quality may be conveyed via forward trading. A privately informed monopolist has the opportunity to make forward sales. Speculators and consumers, participating in the forward and the spot markets respectively, observe the monopolist's decisions in these markets. We show that forward trading may emerge in equilibrium although the monopolist has neither insurance nor hedging incentives. Indeed, the high-quality monopolist uses forward trading to reduce the cost of signalling quality through spot prices. We conclude that forward trading indirectly contributes to signal quality more efficiently in the spot market. Copyright 2003 by the RAND Corporation.

Suggested Citation

  • Mahenc, Philippe & Meunier, Valerie, 2003. " Forward Markets and Signals of Quality," RAND Journal of Economics, The RAND Corporation, vol. 34(3), pages 478-494, Autumn.
  • Handle: RePEc:rje:randje:v:34:y:2003:i:3:p:478-94
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    Cited by:

    1. Manfredo, Mark R. & Sanders, Dwight R., 2008. "Price discovery in a private cash forward market for lumber," Journal of Forest Economics, Elsevier, vol. 14(1), pages 73-89, January.
    2. Dubois, Pierre & Nauges, Céline, 2010. "Identifying the effect of unobserved quality and expert reviews in the pricing of experience goods: Empirical application on Bordeaux wine," International Journal of Industrial Organization, Elsevier, vol. 28(3), pages 205-212, May.
    3. Auriol, Emmanuelle & Schilizzi, Steven G.M., 2003. "Quality Signaling through Certification. Theory and an Application to Agricultural Seed Market," IDEI Working Papers 165, Institut d'Économie Industrielle (IDEI), Toulouse.
    4. Mahenc, P. & Salanie, F., 2004. "Softening competition through forward trading," Journal of Economic Theory, Elsevier, vol. 116(2), pages 282-293, June.

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