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Do Forward Markets Enhance Competition? Experimental Evidence

Author

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  • Le Coq, Chloé

    (Dept. of Economics, Stockholm School of Economics)

  • Orzen, Henrik

    (School of Economics, University Park)

Abstract

Hedging risks is an important rationale for the existence of forward markets. However, Allaz and Vila (1993) show that duopolists can also have a strategic motive to sell forward, irrespective of exogenous uncertainties. Moreover, in their model the possibility of forward trading increases competitiveness between the two firms, raising consumer surplus and welfare. In this study we analyze the case of an n firm oligopoly in Allaz’ and Vila’s framework and derive comparative static predictions with regard to the market institution and the number of competitors. We then test the theoretical hypotheses in a laboratory experiment. Our findings support the main comparative-static predictions of the model but also suggest that, when compared to the increase in competitive pressure due to entry, the competition-enhancing effect of a forward market is weaker than predicted.

Suggested Citation

  • Le Coq, Chloé & Orzen, Henrik, 2002. "Do Forward Markets Enhance Competition? Experimental Evidence," SSE/EFI Working Paper Series in Economics and Finance 506, Stockholm School of Economics, revised 01 Oct 2004.
    • Handle: RePEc:hhs:hastef:0506
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    References listed on IDEAS

    as
    1. Allaz Blaise & Vila Jean-Luc, 1993. "Cournot Competition, Forward Markets and Efficiency," Journal of Economic Theory, Elsevier, vol. 59(1), pages 1-16, February.
    2. Huck, Steffen & Muller, Wieland & Normann, Hans-Theo, 2004. "Strategic delegation in experimental markets," International Journal of Industrial Organization, Elsevier, vol. 22(4), pages 561-574, April.
    3. Jordi Brandts & Paul Pezanis‐Christou & Arthur Schram, 2008. "Competition with forward contracts: a laboratory analysis motivated by electricity market design," Economic Journal, Royal Economic Society, vol. 118(525), pages 192-214, January.
    4. Huck, Steffen & Normann, Hans-Theo & Oechssler, Jorg, 2004. "Two are few and four are many: number effects in experimental oligopolies," Journal of Economic Behavior & Organization, Elsevier, vol. 53(4), pages 435-446, April.
    5. David M. Newbery, 1998. "Competition, Contracts, and Entry in the Electricity Spot Market," RAND Journal of Economics, The RAND Corporation, vol. 29(4), pages 726-749, Winter.
    6. Huck, Steffen & Normann, Hans-Theo & Oechssler, Jorg, 1999. "Learning in Cournot Oligopoly--An Experiment," Economic Journal, Royal Economic Society, vol. 109(454), pages 80-95, March.
    7. Huck, Steffen & Muller, Wieland & Normann, Hans-Theo, 2001. "Stackelberg Beats Cournot: On Collusion and Efficiency in Experimental Markets," Economic Journal, Royal Economic Society, vol. 111(474), pages 749-765, October.
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    More about this item

    Keywords

    Cournot Competition; Forward Markets; Spot Markets; Experiments;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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