Relaxing Competition through Speculation: Committing to a Negative Supply Slope
We demonstrate how suppliers can take strategic speculative positions in derivatives markets to soften competition in the spot market. In our game, suppliers first choose a portfolio of call options and then compete with supply functions. In equilibrium firms sell forward contracts and buy call options to commit to downward sloping supply functions. Although this strategy is risky, it reduces the elasticity of the residual demand of competitors, who increase their mark-ups in response. We show that this type of strategic speculation increases the level and volatility of commodity prices and decreases welfare.
|Date of creation:||07 Nov 2012|
|Date of revision:|
|Publication status:||Published as Holmberg, Pär and Bert Willems, 'Relaxing Competition through Speculation: Committing to a Negative Supply Slope' in Journal of Economic Theory, 2015, pages 236-266.|
|Contact details of provider:|| Postal: Research Institute of Industrial Economics, Box 55665, SE-102 15 Stockholm, Sweden|
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