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Financial contracts as coordination device

Author

Listed:
  • Chloé Le Coq

    (CRED - Centre de Recherche en Economie et Droit - UP2 - Université Panthéon-Assas)

  • Sebastian Schwenen

    (TUM - Technische Universität Munchen = Technical University Munich = Université Technique de Munich)

Abstract

We study the use of fi nancial contracts as bid-coordinating device in multi-unit uniform price auctions. Coordination is required whenever firms face a volunteer's dilemma in pricing strategies: one firm (the "volunteer") is needed to increase the market clearing price. Volunteering, however, is costly, as inframarginal suppliers sell their entire capacity whereas the volunteer only sells residual demand. We identify conditions under which signing financial contracts solves this dilemma. We test our framework exploiting data on contract positions by large producers in the New York power market. Using a Monte Carlo simulation, we show that the contracting strategy is payoff dominant and provide estimates of the benefits of such strategy.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Chloé Le Coq & Sebastian Schwenen, 2020. "Financial contracts as coordination device," Post-Print hal-04129332, HAL.
    • Handle: RePEc:hal:journl:hal-04129332
    DOI: 10.1111/jems.12340
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    Cited by:

    1. is not listed on IDEAS
    2. Geert Van Moer, 2024. "Secret Bilateral Forward Contracting," Journal of Industrial Economics, Wiley Blackwell, vol. 72(2), pages 807-847, June.
    3. Brown, David P. & Eckert, Andrew & Silveira, Douglas, 2023. "Screening for collusion in wholesale electricity markets: A literature review," Utilities Policy, Elsevier, vol. 85(C).

    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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