Many commodities are traded on both a spot market and a derivative market. We show that an incumbent producer may use financial derivatives to extract rent from a potential entrant. The incumbent can indeed sell insurance to a large buyer to commit himself to compete aggressively in the spot market and drive the price down for the entrant. It can do so by selling derivatives for more than his expected production level, i.e. by taking a speculative position. This comes at the cost of inefficiently deterring entry.
|Place of Publication||Tilburg|
|Number of pages||28|
|Publication status||Published - 2010|
|Name||TILEC Discussion Paper|
- financial contracts
- risk aversion