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Forward Contracts, Market Structure, and the Welfare Effects of Mergers

Author

Listed:
  • Nathan Miller

    (Georgetown University)

  • Joseph Podwol

    (U.S. Department of Justice)

Abstract

We examine how forward contracts affect economic outcomes under generalized market structures. In the model, forward contracts discipline the exercise of market power by making profit less sensitive to changes in output. This impact is greatest in markets with intermediate levels of concentration. Mergers reduce the use of forward contracts in equilibrium and, in markets that are sufficiently concentrated, this ampli-fies the adverse effects on consumer surplus. Additional analyses of merger profitability and collusion are provided. Throughout, we illustrate and extend the theoretical re-sults using Monte Carlo simulations. The results have practical relevance for antitrust enforcement.

Suggested Citation

  • Nathan Miller & Joseph Podwol, 2017. "Forward Contracts, Market Structure, and the Welfare Effects of Mergers," EAG Discussions Papers 201702, Department of Justice, Antitrust Division.
    • Handle: RePEc:doj:eagpap:201702
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    File URL: https://www.justice.gov/atr/forward-contracts-market-structure-and-welfare-e-ects-mergers
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    More about this item

    Keywords

    forward contracts; hedging; mergers; antitrust policy;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • L44 - Industrial Organization - - Antitrust Issues and Policies - - - Antitrust Policy and Public Enterprise, Nonprofit Institutions, and Professional Organizations

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