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Durable Goods Monopoly and Forward Markets

  • Gregory Goering
  • Michael Pippenger

The existence of forward markets has long been explained by risk hedging behaviour. More recently, attention has focused on the Cournot competition rationale for the emergence of forward markets since the quantity of forward transactions can be used as strategic variable. However, an important facet of many forward markets that has typically been ignored in the literature is the durable nature of output (e.g. nickel and lead). We show that forward markets may optimally emerge as long as a monopolist sells any fraction of its durable output. In particular, the comparative static analysis shows that as the durability of the product increases or the fraction of output sold increases, the monopolist will optimally increase the number of forward contracts purchased due to an exacerbated commitment problem with buyers. Our analysis also provides another explanation for differences between the forward price and the expected future spot price of a commodity that does not rely on uncertainty or risk considerations.

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Article provided by Taylor & Francis Journals in its journal International Journal of the Economics of Business.

Volume (Year): 9 (2002)
Issue (Month): 2 ()
Pages: 271-282

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Handle: RePEc:taf:ijecbs:v:9:y:2002:i:2:p:271-282
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  1. Bulow, Jeremy I, 1982. "Durable-Goods Monopolists," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 314-32, April.
  2. Olsen, Trond E., 1992. "Durable goods monopoly, learning by doing and the Coase conjecture," European Economic Review, Elsevier, vol. 36(1), pages 157-177, January.
  3. Gul, Faruk & Sonnenschein, Hugo & Wilson, Robert, 1986. "Foundations of dynamic monopoly and the coase conjecture," Journal of Economic Theory, Elsevier, vol. 39(1), pages 155-190, June.
  4. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law and Economics, University of Chicago Press, vol. 15(1), pages 143-49, April.
  5. Bhatt, Swati, 1989. "Demand uncertainty in a durable goods monopoly," International Journal of Industrial Organization, Elsevier, vol. 7(3), pages 341-355.
  6. Purohit, Devavrat, 1995. "Marketing Channels and the Durable Goods Monopolist: Renting versus Selling Reconsidered," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(1), pages 69-84, Spring.
  7. Allaz, Blaise, 1992. "Oligopoly, uncertainty and strategic forward transactions," International Journal of Industrial Organization, Elsevier, vol. 10(2), pages 297-308, June.
  8. Goering, Gregory E., 1992. "Oligopolies and product durability," International Journal of Industrial Organization, Elsevier, vol. 10(1), pages 55-63, March.
  9. Bulow, Jeremy, 1986. "An Economic Theory of Planned Obsolescence," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 729-49, November.
  10. Karp, Larry, 1995. "Monopoly Power can be Disadvantageous in the Extraction of a Durable Nonrenewable Resource," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt4cs0m1vb, Department of Agricultural & Resource Economics, UC Berkeley.
  11. Allaz Blaise & Vila Jean-Luc, 1993. "Cournot Competition, Forward Markets and Efficiency," Journal of Economic Theory, Elsevier, vol. 59(1), pages 1-16, February.
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