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Abuse of forward contracts to semi-collude in volatile markets

  • Aichele, Markus
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    I model the optimal semi-collusive strategy of firms using forward contracts in volatile markets. It has been shown that forward contracts can be used to stabilize a collusive agreement under deterministic (Liski and Montero, 2006) as well as under stochastic market conditions (Aichele, 2012). However, forward trading has a negative effect on the expected profit for collusive firms, since firms have the obligation to fulfill their forward contracts in booms as well as in recessions. Thus, in recessions firms involuntarily sell more than the optimal collusive amount. This profit decreasing effect of forward trading is in contrast to the existing literature, since under certainty forward trading does not alter the collusive profit.

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    Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order with number 79755.

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    Date of creation: 2013
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    Handle: RePEc:zbw:vfsc13:79755
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    1. Juan Toro & Natalia Fabra, 2002. "Price Wars and Collusion in the Spanish Electricity Market," Economics Series Working Papers 136, University of Oxford, Department of Economics.
    2. Matti Liski & Juan-Pablo Montero, 2005. "Forward trading and collusion in oligopoly," Working Papers 0506, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
    3. Dastidar, Krishnendu Ghosh, 1995. "On the Existence of Pure Strategy Bertrand Equilibrium," Economic Theory, Springer, vol. 5(1), pages 19-32, January.
    4. Green, Edward J & Porter, Robert H, 1984. "Noncooperative Collusion under Imperfect Price Information," Econometrica, Econometric Society, vol. 52(1), pages 87-100, January.
    5. Mouraviev, Igor & Rey, Patrick, 2011. "Collusion and leadership," International Journal of Industrial Organization, Elsevier, vol. 29(6), pages 705-717.
    6. Adilov, Nodir, 2012. "Strategic use of forward contracts and capacity constraints," International Journal of Industrial Organization, Elsevier, vol. 30(2), pages 164-173.
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