Exclusion Through Speculation

C. Argenton; Bert Willems

Exclusion Through Speculation

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Abstract

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.

Original language	English
Place of Publication	Tilburg
Publisher	Microeconomics
Number of pages	28
Volume	2010-83
Publication status	Published - 2010

Publication series

Name	CentER Discussion Paper
Volume	2010-83

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

SDG 10 Reduced Inequalities

Keywords

exclusion
monopolization
contracts
financial contracts
derivatives
risk aversion
speculation

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2010-83

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AU - Willems, Bert

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N2 - 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.

AB - 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.

KW - exclusion

KW - monopolization

KW - contracts

KW - financial contracts

KW - derivatives

KW - risk aversion

KW - speculation

M3 - Discussion paper

VL - 2010-83

T3 - CentER Discussion Paper

BT - Exclusion Through Speculation

PB - Microeconomics

CY - Tilburg

ER -

Exclusion Through Speculation

Abstract

Publication series

UN SDGs

Keywords

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