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Vertical Integration and Long-Term Contracts in Risky Markets

  • Baldursson , Fridrik M.


    (University of Iceland)

  • von der Fehr, Nils-Henrik


    (Dept. of Economics, University of Oslo)

We consider the effects of vertical integration on the performance of long-term and spot markets when spot prices are uncertain and agents are risk averse. We find that vertical integration impairs market performance by increasing the gap between contract and (expected) spot prices. This holds regardless of whether retail prices are fixed or linked to spot prices. Depending upon the characteristics of demand and supply, vertical integration (and long-term contracting) may increase or decrease spot-price volatility.

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Paper provided by Oslo University, Department of Economics in its series Memorandum with number 01/2007.

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Length: 37 pages
Date of creation: 30 Jan 2007
Date of revision:
Handle: RePEc:hhs:osloec:2007_001
Contact details of provider: Postal:
Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway

Phone: 22 85 51 27
Fax: 22 85 50 35
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  24. Mahenc, P. & Salanie, F., 2004. "Softening competition through forward trading," Journal of Economic Theory, Elsevier, vol. 116(2), pages 282-293, June.
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  29. Bert Willems, 2004. "Cournot Competition, Financial Option markets and Efficiency," Working Papers Department of Economics ces0414, KU Leuven, Faculty of Economics and Business, Department of Economics.
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