TY - UNPB
T1 - Relaxing Competition through Speculation
T2 - Committing to a Negative Supply Slope
AU - Holmberg, P.
AU - Willems, Bert
N1 - Pagination: 33
PY - 2012
Y1 - 2012
N2 - Abstract: We demonstrate how suppliers can take strategic speculative positions in derivatives markets to soften competition in the spot market. In our game, suppliers first choose a portfolio of call options and then compete with supply functions. In equilibrium firms sell forward contracts and buy call options to commit to downward sloping supply functions. Although this strategy is risky, it reduces the elasticity of the residual demand of competitors, who increase their mark-ups in response. We show that this type of strategic speculation increases the level and volatility of commodity prices and decreases welfare.
AB - Abstract: We demonstrate how suppliers can take strategic speculative positions in derivatives markets to soften competition in the spot market. In our game, suppliers first choose a portfolio of call options and then compete with supply functions. In equilibrium firms sell forward contracts and buy call options to commit to downward sloping supply functions. Although this strategy is risky, it reduces the elasticity of the residual demand of competitors, who increase their mark-ups in response. We show that this type of strategic speculation increases the level and volatility of commodity prices and decreases welfare.
KW - Supply function equilibrium
KW - Option contracts
KW - Strategic commitment
KW - Speculation
M3 - Discussion paper
VL - 2012-039
T3 - TILEC Discussion Paper
BT - Relaxing Competition through Speculation
PB - TILEC
CY - Tilburg
ER -