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Durable Goods Monopoly and Forward Markets

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  • Gregory Goering
  • Michael Pippenger

Abstract

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.

Suggested Citation

  • Gregory Goering & Michael Pippenger, 2002. "Durable Goods Monopoly and Forward Markets," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 9(2), pages 271-282.
    • Handle: RePEc:taf:ijecbs:v:9:y:2002:i:2:p:271-282
    DOI: 10.1080/13571510210135005A
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    References listed on IDEAS

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    Cited by:

    1. Goering, Gregory E. & Sarangi, Sudipta, 2012. "Durable goods produced by state owned enterprises," Economic Modelling, Elsevier, vol. 29(3), pages 893-899.
    2. Gregory E. Goering, 2007. "Durable‐Goods Monopoly With Maintenance," Bulletin of Economic Research, Wiley Blackwell, vol. 59(3), pages 231-246, July.
    3. MURPHY, Frederic & SMEERS, Yves, 2005. "Forward markets may not decrease market power when capacities are endogenous," LIDAM Discussion Papers CORE 2005028, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    4. Goering, Gregory E., 2007. "Durability choice with differentiated products," Research in Economics, Elsevier, vol. 61(2), pages 105-112, June.
    5. Gregory E. Goering, 2010. "Corporate social responsibility, durable-goods and firm profitability," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 31(7), pages 489-496.
    6. Gregory E. Goering, 2011. "Gun Buybacks and Firm Behavior: Do Buyback Programs Really Reduce the Number of Guns?," Review of Economics & Finance, Better Advances Press, Canada, vol. 1, pages 31-42, February.
    7. Goering, Gregory E., 2008. "Socially concerned firms and the provision of durable goods," Economic Modelling, Elsevier, vol. 25(3), pages 575-583, May.
    8. Gregory E. Goering, 2006. "Non-Profit Firms and the Provision of Durable Goods," Departmental Working Papers 2006-16, Department of Economics, Louisiana State University.

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