Relaxing competition through speculation: Committing to a negative supply slope

Par Holmberg, Bert Willems

Research output: Contribution to journalArticleScientificpeer-review

Abstract

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.
LanguageEnglish
Pages236-266
JournalJournal of Economic Theory
Volume159
Issue numberA
DOIs
StatePublished - Sep 2015

Fingerprint

Speculation
Call option
Elasticity
Spot market
Forward contracts
Markups
Derivative markets
Competitors
Commodities

Keywords

  • supply function equilibrium
  • option contracts
  • strategic commitment

Cite this

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Relaxing competition through speculation : Committing to a negative supply slope. / Holmberg, Par; Willems, Bert.

In: Journal of Economic Theory, Vol. 159, No. A, 09.2015, p. 236-266.

Research output: Contribution to journalArticleScientificpeer-review

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