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Relaxing competition through speculation: Committing to a negative supply slope
Holmberg,Par Willems,Bert
Holmberg,Par
Willems,Bert
Abstract
We demonstrate how commodity producers can take strategic speculative positions in derivatives markets to soften competition in the spot market. In our game, producers first choose a portfolio of call options and then compete in supply functions. In equilibrium, producers sell forward contracts and buy call options to commit to downward sloping supply functions. Although this strategy is risky, it is profitable because it reduces the elasticity of the residual demand of competitors who respond by increasing mark-ups.
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Date
2015-09
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Keywords
supply function equilibrium, option contracts, strategic commitment, C73 - Stochastic and Dynamic Games ; Evolutionary Games ; Repeated Games, D43 - Oligopoly and Other Forms of Market Imperfection, G13 - Contingent Pricing ; Futures Pricing, L13 - Oligopoly and Other Imperfect Markets, L94 - Electric Utilities
Citation
Holmberg, P & Willems, B 2015, 'Relaxing competition through speculation : Committing to a negative supply slope', Journal of Economic Theory, vol. 159, no. A, pp. 236-266. https://doi.org/10.1016/j.jet.2015.06.004
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info:eu-repo/semantics/openAccess