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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

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    File URL: https://www.bsp.gov.ph/Sites/researchsite/Publications/BSP-Discussion-Papers/DP202520.pdf
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    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

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