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Speculative Constraints on Oligopoly

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  • Sebastien Mitraille

    () (Toulouse Business School, University of Toulouse)

  • Henry Thille

    () (Department of Economics and Finance, University of Guelph)

Abstract

We examine an infinite horizon game in which producers’ output can be purchased by speculators for resale in a future period. The existence of speculators serves to constrain the feasible set of prices that can result from producers’ output game in each period. Absent speculation, producers play a repeated Cournot game with random demand. With speculative inventories possible, the game becomes a dynamic one in which speculative stocks are a state variable which firms can control via their influence on price. We employ collocation methods to find the unknown expected price and value functions required for computation of equilibrium quantities. We demonstrate that strategic considerations result in an incentive to sell to speculators that is nonmonotonic in the number of producers: speculation has the largest effect on equilibrium prices and welfare for market structures intermediate between monopoly and perfect competition. Using a computed example, we demonstrate that the effect of speculative storage on the average price level can be substantial, even though the effects on social welfare can be ambiguous.

Suggested Citation

  • Sebastien Mitraille & Henry Thille, 2015. "Speculative Constraints on Oligopoly," Working Papers 1505, University of Guelph, Department of Economics and Finance.
  • Handle: RePEc:gue:guelph:2015-05
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    References listed on IDEAS

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    7. Lutz Kilian, 2009. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review, American Economic Association, vol. 99(3), pages 1053-1069, June.
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    Cited by:

    1. Antoniou, Fabio & Fiocco, Raffaele, 2020. "Storable good market with intertemporal cost variations," MPRA Paper 97948, University Library of Munich, Germany.

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    More about this item

    Keywords

    Inventory; speculation; oligopoly; commodity markets;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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