Exclusion through speculation

Research output: Contribution to journalArticleScientificpeer-review

Abstract

We demonstrate how an incumbent producer of commodities can use cash-settled derivatives contracts to deter entry and extract rents from a potential competitor. By selling more derivatives than total demand, the producer commits to low prices and forces the entrant to price low upon entry. By setting a high upfront derivatives price, the producer can extract the consumer's gains from those low prices. This exclusionary scheme becomes more difficult when the buyer becomes more risk averse and with multiple buyers.
Original languageEnglish
Pages (from-to)1-9
JournalInternational Journal of Industrial Organization
Volume39
DOIs
Publication statusPublished - Mar 2015

Fingerprint

Derivatives
Sales
Speculation
Exclusion
Buyers
Competitors
Cash
Commodities
Incumbents
Rent
Risk-averse

Keywords

  • Exclusion
  • Monopolization
  • Financial contracts
  • Derivatives
  • Risk Aversion

Cite this

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title = "Exclusion through speculation",
abstract = "We demonstrate how an incumbent producer of commodities can use cash-settled derivatives contracts to deter entry and extract rents from a potential competitor. By selling more derivatives than total demand, the producer commits to low prices and forces the entrant to price low upon entry. By setting a high upfront derivatives price, the producer can extract the consumer's gains from those low prices. This exclusionary scheme becomes more difficult when the buyer becomes more risk averse and with multiple buyers.",
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Exclusion through speculation. / Argenton, Cedric; Willems, Bert.

In: International Journal of Industrial Organization, Vol. 39, 03.2015, p. 1-9.

Research output: Contribution to journalArticleScientificpeer-review

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AB - We demonstrate how an incumbent producer of commodities can use cash-settled derivatives contracts to deter entry and extract rents from a potential competitor. By selling more derivatives than total demand, the producer commits to low prices and forces the entrant to price low upon entry. By setting a high upfront derivatives price, the producer can extract the consumer's gains from those low prices. This exclusionary scheme becomes more difficult when the buyer becomes more risk averse and with multiple buyers.

KW - Exclusion

KW - Monopolization

KW - Financial contracts

KW - Derivatives

KW - Risk Aversion

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