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Forward contracts and competition

Author

Listed:
  • Manel Antelo

    () (Departamento de Fundamentos da Análise Económica, Universidade de Santiago de Compostela, Campus Norte, 15782 Santiago de Compostela, Spain Departamento de Teoría e Historia Económica, Universidad de Málaga, Plaza El Ejido, 29071 Málaga, Spain)

  • Lluís Bru

    () (Departamento de Fundamentos da Análise Económica, Universidade de Santiago de Compostela, Campus Norte, 15782 Santiago de Compostela, Spain Departamento de Teoría e Historia Económica, Universidad de Málaga, Plaza El Ejido, 29071 Málaga, Spain)

Abstract

This paper examines the strategic use of forward contracts in an industry where downstream firms must buy an essential input from imperfectly competitive upstream suppliers. When a single large firm and a fringe of firms exist downstream, the large firm buys forward contracts from the fringe, i.e. there is horizontal subcontracting from the large firm to the firms on the fringe, in order to make the spot market less competitive. Hence our paper argues that horizontal subcontracting becomes an anti-competitive device. We also compare the strategies of buying forward contracts and purchasing productive capacity and we find that both are equivalent tools. When the downstream industry has instead several large firms, they have a "horizontal" incentive to sell forward contracts in order to gain market share, but the former "vertical" incentive to buy them persists. In this case, forward contracting may then lead to less competition in the spot market.

Suggested Citation

  • Manel Antelo & Lluís Bru, 2002. "Forward contracts and competition," Spanish Economic Review, Springer;Spanish Economic Association, vol. 4(4), pages 281-300.
  • Handle: RePEc:spr:specre:v:4:y:2002:i:4:p:281-300
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    Cited by:

    1. Antelo, Manel & Bru, Lluís, 2016. "Option contracts in a vertical industry," MPRA Paper 79241, University Library of Munich, Germany, revised 14 Apr 2017.
    2. repec:eee:ejores:v:261:y:2017:i:2:p:540-548 is not listed on IDEAS

    More about this item

    Keywords

    Intermediate markets; buyer power; forward contracts; horizontal subcontracting;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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