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.
- supply function equilibrium
- option contracts
- strategic commitment
Holmberg, P., & Willems, B. (2015). Relaxing competition through speculation: Committing to a negative supply slope. Journal of Economic Theory, 159(A), 236-266. https://doi.org/10.1016/j.jet.2015.06.004