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The role of observability in futures markets

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  • Ferreira, José Luis

Abstract

Allaz and Vila (1993) show that oligopolistic industries may become more competitive if a futures market is added previous to the spot market. Later, Hughes and Kao (1997) show that this result occurs only if positions in the futures market are observed, and that without this condition the result is again the Cournot equilibrium. In this work we study different explicit formulations of observability and argue that the lack of it may induce a result very different from the one anticipated in Hughes and Kao (1997). By comparing the game forms of the different models, one can discuss about the suitability of either of them. In particular, the one we find most reasonable fit better some of the stylized facts of an industry like the power market in the U.K.

Suggested Citation

  • Ferreira, José Luis, 2001. "The role of observability in futures markets," UC3M Working papers. Economics we015316, Universidad Carlos III de Madrid. Departamento de Economía.
  • Handle: RePEc:cte:werepe:we015316
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    References listed on IDEAS

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    1. Hughes, John S. & Kao, Jennifer L., 1997. "Strategic forward contracting and observability," International Journal of Industrial Organization, Elsevier, vol. 16(1), pages 121-133, November.
    2. Ferreira, Jose Luis, 2003. "Strategic interaction between futures and spot markets," Journal of Economic Theory, Elsevier, vol. 108(1), pages 141-151, January.
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    Cited by:

    1. Miguel Vazquez, 2012. "Analysis of the strategic use of forward contracting in electricity markets," RSCAS Working Papers 2012/13, European University Institute.
    2. 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.
    3. ABADA, Ibrahim & EHRENMANN, Andreas & SMEERS, Yves, 2014. "Endogenizing long-term contracts in gas market models," CORE Discussion Papers 2014036, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    4. Le Coq, Chloe & Orzen, Henrik, 2006. "Do forward markets enhance competition?: Experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 61(3), pages 415-431, November.
    5. Pär Holmberg, 2011. "Strategic Forward Contracting in the Wholesale Electricity Market," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 169-202.
    6. Remco van Eijkel & Jose Luis Moraga, 2010. "Do Firms sell forward for Strategic Reasons? An Application to the Wholesale Market for Natural Gas," Tinbergen Institute Discussion Papers 10-058/1, Tinbergen Institute.
    7. Sebastien Mitraille & Henry Thille, 2017. "Strategic advance sales, demand uncertainty and overcommitment," Working Papers 1708, University of Guelph, Department of Economics and Finance.
    8. Adilov, Nodir, 2012. "Strategic use of forward contracts and capacity constraints," International Journal of Industrial Organization, Elsevier, vol. 30(2), pages 164-173.

    More about this item

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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