IDEAS home Printed from https://ideas.repec.org/a/spr/joecth/v69y2020i3d10.1007_s00199-019-01184-w.html
   My bibliography  Save this article

Strategic advance sales, demand uncertainty and overcommitment

Author

Listed:
  • Sébastien Mitraille

    () (University of Toulouse)

  • Henry Thille

    (University of Guelph)

Abstract

We study a game in which producers can sell both before and after the realization of a random demand. Models of strategic forward trading and of advance sales to intermediaries or consumers share this structure. Demand uncertainty and committed advance sales imply that final-stage net residual demand may be so low that producers find additional sales unprofitable, or even so low that the final period price is zero, introducing some convexity into producers’ payoffs. If such an ex-post overcommitment occurs on the equilibrium path, producers reduce their advance sales, muting the pro-competitive effects found under deterministic demand. We prove existence of a unique symmetric pure-strategy equilibrium, whose nature depends on the support of the demand distribution relative to the marginal cost of production. For a narrow support, existence is assured for any distribution, while for wider support we establish a sufficient condition for existence. Our results provide a precise characterization of “minor” uncertainty, in which only the expected value of demand affects the equilibrium which is otherwise qualitatively similar to the deterministic case.

Suggested Citation

  • Sébastien Mitraille & Henry Thille, 2020. "Strategic advance sales, demand uncertainty and overcommitment," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 69(3), pages 789-828, April.
  • Handle: RePEc:spr:joecth:v:69:y:2020:i:3:d:10.1007_s00199-019-01184-w
    DOI: 10.1007/s00199-019-01184-w
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s00199-019-01184-w
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Allaz Blaise & Vila Jean-Luc, 1993. "Cournot Competition, Forward Markets and Efficiency," Journal of Economic Theory, Elsevier, vol. 59(1), pages 1-16, February.
    2. Mark Bagnoli & Ted Bergstrom, 2006. "Log-concave probability and its applications," Studies in Economic Theory, in: Charalambos D. Aliprantis & Rosa L. Matzkin & Daniel L. McFadden & James C. Moore & Nicholas C. Yann (ed.), Rationality and Equilibrium, pages 217-241, Springer.
    3. Bagwell, Kyle, 1995. "Commitment and observability in games," Games and Economic Behavior, Elsevier, vol. 8(2), pages 271-280.
    4. Elie Appelbaum & Chin Lim, 1985. "Contestable Markets under Uncertainty," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 28-40, Spring.
    5. Stanley S. Reynolds & David Rietzke, 2018. "Price caps, oligopoly, and entry," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 66(3), pages 707-745, October.
    6. Saloner, Garth, 1987. "Cournot duopoly with two production periods," Journal of Economic Theory, Elsevier, vol. 42(1), pages 183-187, June.
    7. 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.
    8. Dana G. Popescu & Sridhar Seshadri, 2013. "Demand Uncertainty and Excess Supply in Commodity Contracting," Management Science, INFORMS, vol. 59(9), pages 2135-2152, September.
    9. Mahenc, P. & Salanie, F., 2004. "Softening competition through forward trading," Journal of Economic Theory, Elsevier, vol. 116(2), pages 282-293, June.
    10. Delphine Lautier & Ivar Ekeland & Bertrand Villeneuve, 2018. "Hedging pressure and speculation in commodity futures markets," Post-Print hal-01787255, HAL.
    11. Holmberg, Pär & Willems, Bert, 2015. "Relaxing competition through speculation: Committing to a negative supply slope," Journal of Economic Theory, Elsevier, vol. 159(PA), pages 236-266.
    12. Liang Guo & J. Miguel Villas‐Boas, 2007. "Consumer Stockpiling and Price Competition in Differentiated Markets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 16(4), pages 827-858, December.
    13. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
    14. Gérard Gaudet & Stephen W. Salant, 1991. "Uniqueness of Cournot Equilibrium: New Results From Old Methods," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 399-404.
    15. Sébastien Mitraille & Michel Moreaux, 2013. "Inventories and Endogenous Stackelberg Leadership in Two‐Period Cournot Oligopoly," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 22(4), pages 852-874, December.
    16. Thille, Henry, 2003. "Forward trading and storage in a Cournot duopoly," Journal of Economic Dynamics and Control, Elsevier, vol. 27(4), pages 651-665, February.
    17. Mitraille, Sébastien & Thille, Henry, 2009. "Monopoly behaviour with speculative storage," Journal of Economic Dynamics and Control, Elsevier, vol. 33(7), pages 1451-1468, July.
    18. Blaise Allaz, 1992. "Oligopoly, uncertainty and strategic forward transactions," Post-Print hal-00511812, HAL.
    19. Giovanni Maggi, 1999. "The Value of Commitment with Imperfect Observability and Private Information," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 555-574, Winter.
    20. van Damme, Eric & Hurkens, Sjaak, 1997. "Games with Imperfectly Observable Commitment," Games and Economic Behavior, Elsevier, vol. 21(1-2), pages 282-308, October.
    21. Paul Klemperer & Margaret Meyer, 1986. "Price Competition vs. Quantity Competition: The Role of Uncertainty," RAND Journal of Economics, The RAND Corporation, vol. 17(4), pages 618-638, Winter.
    22. Mitraille, Sébastien & Thille, Henry, 2014. "Speculative storage in imperfectly competitive markets," International Journal of Industrial Organization, Elsevier, vol. 35(C), pages 44-59.
    23. Pal, Debashis, 1991. "Cournot duopoly with two production periods and cost differentials," Journal of Economic Theory, Elsevier, vol. 55(2), pages 441-448, December.
    24. Blaise Allaz & Jean-Luc Vila, 1993. "Cournot Competition, Forward Markets and Efficiency," Post-Print hal-00511806, HAL.
    25. Vives, Xavier, 1989. "Technological competition, uncertainty, and oligopoly," Journal of Economic Theory, Elsevier, vol. 48(2), pages 386-415, August.
    26. Stylianos Perrakis & George Warskett, 1983. "Capacity and Entry Under Demand Uncertainty," Review of Economic Studies, Oxford University Press, vol. 50(3), pages 495-511.
    27. James J. Anton & Gopal Das Varma, 2005. "Storability, Market Structure, and Demand-Shift Incentives," RAND Journal of Economics, The RAND Corporation, vol. 36(3), pages 520-543, Autumn.
    28. Igal Hendel & Paolo Dudine & Alessandro Lizzeri, 2006. "Storable Good Monopoly: The Role of Commitment," American Economic Review, American Economic Association, vol. 96(5), pages 1706-1719, December.
    29. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, February.
    30. Holmberg, Pär & Willems, Bert, 2015. "Relaxing competition through speculation: Committing to a negative supply slope," Journal of Economic Theory, Elsevier, vol. 159(PA), pages 236-266.
    31. Sadanand, Asha & Sadanand, Venkatraman, 1996. "Firm Scale and the Endogenous Timing of Entry: a Choice between Commitment and Flexibility," Journal of Economic Theory, Elsevier, vol. 70(2), pages 516-530, August.
    32. Ferreira, Jose Luis, 2003. "Strategic interaction between futures and spot markets," Journal of Economic Theory, Elsevier, vol. 108(1), pages 141-151, January.
    33. Spencer, Barbara J. & Brander, James A., 1992. "Pre-commitment and flexibility : Applications to oligopoly theory," European Economic Review, Elsevier, vol. 36(8), pages 1601-1626, December.
    34. Liski, Matti & Montero, Juan-Pablo, 2006. "Forward trading and collusion in oligopoly," Journal of Economic Theory, Elsevier, vol. 131(1), pages 212-230, November.
    35. Allaz, Blaise, 1992. "Oligopoly, uncertainty and strategic forward transactions," International Journal of Industrial Organization, Elsevier, vol. 10(2), pages 297-308, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. MITRAILLE Sébastien & MOREAUX Michel, 2007. "Inventories and Endogenous Stackelberg Hierarchy in Two-period Cournot Oligopoly," LERNA Working Papers 07.02.223, LERNA, University of Toulouse.
    2. van Eijkel, Remco & Kuper, Gerard H. & Moraga-González, José L., 2016. "Do firms sell forward for strategic reasons? An application to the wholesale market for natural gas," International Journal of Industrial Organization, Elsevier, vol. 49(C), pages 1-35.
    3. Sébastien Mitraille & Michel Moreaux, 2013. "Inventories and Endogenous Stackelberg Leadership in Two‐Period Cournot Oligopoly," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 22(4), pages 852-874, December.
    4. Breitmoser, Yves, 2012. "On the endogeneity of Cournot, Bertrand, and Stackelberg competition in oligopolies," International Journal of Industrial Organization, Elsevier, vol. 30(1), pages 16-29.
    5. Chloé Le Coq & Sebastian Schwenen, 2020. "Financial contracts as coordination device," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 29(2), pages 241-259, April.
    6. Nathan H. Miller & Joseph U. Podwol, 2020. "Forward Contracts, Market Structure and the Welfare Effects of Mergers," Journal of Industrial Economics, Wiley Blackwell, vol. 68(2), pages 364-407, June.
    7. Mitraille, Sébastien & Thille, Henry, 2014. "Speculative storage in imperfectly competitive markets," International Journal of Industrial Organization, Elsevier, vol. 35(C), pages 44-59.
    8. Breitmoser, Yves, 2013. "Increasing marginal costs are strategically beneficial in forward trading," Economics Letters, Elsevier, vol. 119(2), pages 109-112.
    9. Wölfing, Nikolas, 2019. "Forward trading and collusion in supply functions," ZEW Discussion Papers 19-003, ZEW - Leibniz Centre for European Economic Research.
    10. Baldursson , Fridrik M. & von der Fehr, Nils-Henrik, 2007. "Vertical Integration and Long-Term Contracts in Risky Markets," Memorandum 01/2007, Oslo University, Department of Economics.
    11. Miguel Vazquez, 2012. "Analysis of the strategic use of forward contracting in electricity markets," RSCAS Working Papers 2012/13, European University Institute.
    12. David P. Brown & Andrew Eckert, 2018. "Analyzing the Impact of Electricity Market Structure Changes and Mergers: The Importance of Forward Commitments," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 52(1), pages 101-137, February.
    13. Dressler, Luisa, 2016. "Support schemes for renewable electricity in the European Union: Producer strategies and competition," Energy Economics, Elsevier, vol. 60(C), pages 186-196.
    14. Adilov, Nodir, 2012. "Strategic use of forward contracts and capacity constraints," International Journal of Industrial Organization, Elsevier, vol. 30(2), pages 164-173.
    15. Breitmoser, Yves, 2010. "A general model of oligopoly endogenizing Cournot, Bertrand, Stackelberg, and Allaz-Vila," MPRA Paper 19998, University Library of Munich, Germany.
    16. Van Moer, Geert, 2019. "Electricity market competition when forward contracts are pairwise efficient," MPRA Paper 96660, University Library of Munich, Germany.
    17. José Luis Ferreira & Praveen Kujal & Stephen Rassenti, 2016. "Multiple Openings and Competitiveness of Forward Markets: Experimental Evidence," PLOS ONE, Public Library of Science, vol. 11(7), pages 1-16, July.
    18. Daron Acemoglu, Ali Kakhbod, and Asuman Ozdaglar, 2017. "Competition in Electricity Markets with Renewable Energy Sources," The Energy Journal, International Association for Energy Economics, vol. 0(KAPSARC S).
    19. Antoniou, Fabio & Fiocco, Raffaele, 2020. "Storable good market with intertemporal cost variations," MPRA Paper 97948, University Library of Munich, Germany.
    20. Breitmoser, Yves, 2012. "Allaz-Vila competition with non-linear costs or demands," MPRA Paper 41772, University Library of Munich, Germany.

    More about this item

    Keywords

    Oligopoly; Advance sales; Uncertainty; Overcommitment;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:joecth:v:69:y:2020:i:3:d:10.1007_s00199-019-01184-w. 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: (Sonal Shukla) or (Springer Nature Abstracting and Indexing). General contact details of provider: http://www.springer.com .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.