IDEAS home Printed from https://ideas.repec.org/p/bhd/dpaper/202520.html

Alternative Trading Rules in an Experimental Forward Market for a Non-Storable Commodity

Author

Listed:
  • Benjamin E. Radoc, Jr.

    (Bangko Sentral ng Pilipinas)

  • Karl Robert L. Jandoc

    (University of the Philippines School of Economics)

  • Majah-Leah V. Ravago

    (Ateneo de Manila University)

Abstract

Past studies reveal that forward markets reduce prices and mitigate market power. However, these results are conditional on the ability of sellers to leverage arbitrage opportunities in spot (real-time) and forward (period-ahead) markets. To investigate this further, we conducted a laboratory experiment to examine the impact of alternative forward market microstructures on the market for a non-storable commodity (i.e., electricity). Contrary to the standard theoretical prediction that forward markets narrow price differentials across stages, offer and clearing prices are persistently higher in the period-ahead stage in a market for a non-storable commodity. Among the forward market microstructures considered in this study, short selling yields the highest offered quantities (as a proportion of capacity) and the lowest average prices. Forward markets with dominant players reinforced higher clearing prices and disproportionately increased earnings of dominant participants. Overall, our findings suggest that forward markets, while potentially stabilizing prices and expanding trading opportunities, do not necessarily guarantee pro-competitive or welfare-improving outcomes in a market for a non-storable commodity like electricity.

Suggested Citation

  • Benjamin E. Radoc, Jr. & Karl Robert L. Jandoc & Majah-Leah V. Ravago, 2025. "Alternative Trading Rules in an Experimental Forward Market for a Non-Storable Commodity," BSP Discussion Paper Series 202520, Bangko Sentral ng Pilipinas.
    • Handle: RePEc:bhd:dpaper:202520
    as

    Download full text from publisher

    File URL: https://www.bsp.gov.ph/Sites/researchsite/Publications/BSP-Discussion-Papers/DP202520.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Crew, Michael A & Kleindorfer, Paul R, 2002. "Regulatory Economics: Twenty Years of Progress?," Journal of Regulatory Economics, Springer, vol. 21(1), pages 5-22, January.
    2. repec:bla:jfinan:v:59:y:2004:i:4:p:1877-1900 is not listed on IDEAS
    3. James Bushnell, 2007. "Oligopoly equilibria in electricity contract markets," Journal of Regulatory Economics, Springer, vol. 32(3), pages 225-245, December.
    4. Ing-Haw Cheng & Wei Xiong, 2014. "Financialization of Commodity Markets," Annual Review of Financial Economics, Annual Reviews, vol. 6(1), pages 419-441, December.
    5. 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.
    6. Jordi Brandts & Paul Pezanis‐Christou & Arthur Schram, 2008. "Competition with forward contracts: a laboratory analysis motivated by electricity market design," Economic Journal, Royal Economic Society, vol. 118(525), pages 192-214, January.
    7. Gaete, Michael & Herrera, Rodrigo, 2023. "Diversification benefits of commodities in portfolio allocation: A dynamic factor copula approach," Journal of Commodity Markets, Elsevier, vol. 32(C).
    8. Simshauser, Paul, 2010. "Vertical integration, credit ratings and retail price settings in energy-only markets: Navigating the Resource Adequacy problem," Energy Policy, Elsevier, vol. 38(11), pages 7427-7441, November.
    9. Paresh Kumar Narayan & Huson Ali Ahmed & Seema Narayan, 2015. "Do Momentum‐Based Trading Strategies Work in the Commodity Futures Markets?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 35(9), pages 868-891, September.
    10. Ama Baafra Abeberese, 2017. "Electricity Cost and Firm Performance: Evidence from India," The Review of Economics and Statistics, MIT Press, vol. 99(5), pages 839-852, December.
    11. 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.
    12. Alvarez, Jorge & Valencia, Fabian, 2016. "Made in Mexico: Energy reform and manufacturing growth," Energy Economics, Elsevier, vol. 55(C), pages 253-265.
    13. Krull, Sebastian & Pelster, Matthias & Steinorth, Petra, 2024. "Skill, effort, luck: Determinants of rank-based endowments and risk-taking in a social setting," Journal of Behavioral and Experimental Finance, Elsevier, vol. 42(C).
    14. Matthias Arnold, Jens & Javorcik, Beata S., 2009. "Gifted kids or pushy parents? Foreign direct investment and plant productivity in Indonesia," Journal of International Economics, Elsevier, vol. 79(1), pages 42-53, September.
    15. Chloé Coq & Henrik Orzen & Sebastian Schwenen, 2017. "Pricing and capacity provision in electricity markets: an experimental study," Journal of Regulatory Economics, Springer, vol. 51(2), pages 123-158, April.
    16. de Frutos, María-Ángeles & Fabra, Natalia, 2012. "How to allocate forward contracts: The case of electricity markets," European Economic Review, Elsevier, vol. 56(3), pages 451-469.
    17. Par Holmberg, 2011. "Strategic Forward Contracting in the Wholesale Electricity Market," The Energy Journal, , vol. 32(1), pages 169-202, January.
    18. repec:bla:jindec:v:47:y:1999:i:1:p:107-24 is not listed on IDEAS
    19. Ausubel, Lawrence M. & Cramton, Peter, 2010. "Using forward markets to improve electricity market design," Utilities Policy, Elsevier, vol. 18(4), pages 195-200, December.
    20. repec:aen:journl:2011v32-01-a07 is not listed on IDEAS
    21. Mahenc, P. & Salanie, F., 2004. "Softening competition through forward trading," Journal of Economic Theory, Elsevier, vol. 116(2), pages 282-293, June.
    22. Blaise Allaz & Jean-Luc Vila, 1993. "Cournot Competition, Forward Markets and Efficiency," Post-Print hal-00511806, HAL.
    23. Green, Richard & Le Coq, Chloé, 2010. "The length of contracts and collusion," International Journal of Industrial Organization, Elsevier, vol. 28(1), pages 21-29, January.
    24. Füss, Roland & Mahringer, Steffen & Prokopczuk, Marcel, 2015. "Electricity derivatives pricing with forward-looking information," Journal of Economic Dynamics and Control, Elsevier, vol. 58(C), pages 34-57.
    25. Bilgili, Faik & Tülüce, Nadide Sevil Halıcı & Doğan, İbrahim, 2012. "The determinants of FDI in Turkey: A Markov Regime-Switching approach," Economic Modelling, Elsevier, vol. 29(4), pages 1161-1169.
    26. Ressner, Ludwig & Liski, Matti & Montero, Juan-Pablo, 2010. "Corrigendum to "Forward trading and collusion in oligopoly" [J. Econ. Theory 131 (1) (2006) 212-230]," Journal of Economic Theory, Elsevier, vol. 145(6), pages 2496-2497, November.
    27. Richard Green, 1999. "The Electricity Contract Market in England and Wales," Journal of Industrial Economics, Wiley Blackwell, vol. 47(1), pages 107-124, March.
    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. David P. Brown & Andrew Eckert, 2017. "Electricity market mergers with endogenous forward contracting," Journal of Regulatory Economics, Springer, vol. 51(3), pages 269-310, June.
    2. 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.
    3. 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.
    4. Di Cosmo, Valeria & Lynch, Muireann Á., 2016. "Competition and the single electricity market: Which lessons for Ireland?," Utilities Policy, Elsevier, vol. 41(C), pages 40-47.
    5. Gallego, Camilo A., 2025. "Economic effects in wholesale electricity markets from endogenous long-term forward contracts indexed to spot conditions," Utilities Policy, Elsevier, vol. 95(C).
    6. 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.
    7. Fiuza de Bragança, Gabriel Godofredo & Daglish, Toby, 2016. "Can market power in the electricity spot market translate into market power in the hedge market?," Energy Economics, Elsevier, vol. 58(C), pages 11-26.
    8. 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.
    9. 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.
    10. repec:aen:journl:ej38-si1-acemoglu is not listed on IDEAS
    11. Wölfing, Nikolas, 2019. "Forward trading and collusion in supply functions," ZEW Discussion Papers 19-003, ZEW - Leibniz Centre for European Economic Research.
    12. 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.
    13. van Koten, Silvester & Ortmann, Andreas, 2013. "Structural versus behavioral remedies in the deregulation of electricity markets: An experimental investigation motivated by policy concerns," European Economic Review, Elsevier, vol. 64(C), pages 256-265.
    14. Fabra, Natalia & de Frutos, Maria-Angeles, 2008. "On the Impact of Forward Contract Obligations in Multi-Unit Auctions," CEPR Discussion Papers 6756, Centre for Economic Policy Research.
    15. Brown, David P. & Eckert, Andrew & Shaffer, Blake, 2023. "Evaluating the impact of divestitures on competition: Evidence from Alberta’s wholesale electricity market," International Journal of Industrial Organization, Elsevier, vol. 89(C).
    16. Hauteclocque, Adrien de & Glachant, Jean-Michel, 2009. "Long-term energy supply contracts in European competition policy: Fuzzy not crazy," Energy Policy, Elsevier, vol. 37(12), pages 5399-5407, December.
    17. Davi-Arderius, Daniel & Jamasb, Tooraj, 2026. "Long-term and spot electricity markets: The technology link in Spain," Utilities Policy, Elsevier, vol. 101(C).
    18. Serra, Pablo, 2013. "Contract market power and its impact on the efficiency of the electricity sector," Energy Policy, Elsevier, vol. 61(C), pages 653-662.
    19. de Frutos, María-Ángeles & Fabra, Natalia, 2012. "How to allocate forward contracts: The case of electricity markets," European Economic Review, Elsevier, vol. 56(3), pages 451-469.
    20. James B. Bushnell & Erin T. Mansur & Celeste Saravia, 2008. "Vertical Arrangements, Market Structure, and Competition: An Analysis of Restructured US Electricity Markets," American Economic Review, American Economic Association, vol. 98(1), pages 237-266, March.
    21. Van Moer, Geert, 2019. "Electricity market competition when forward contracts are pairwise efficient," MPRA Paper 96660, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:bhd:dpaper:202520. See general information about how to correct material in RePEc.

    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 bibliographic 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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MB Pagalunan (email available below). General contact details of provider: https://edirc.repec.org/data/bspgvph.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.