TY - JOUR
T1 - Relaxing competition through speculation
T2 - Committing to a negative supply slope
AU - Holmberg, Par
AU - Willems, Bert
PY - 2015/9
Y1 - 2015/9
N2 - 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.
AB - 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.
KW - supply function equilibrium
KW - option contracts
KW - strategic commitment
UR - http://www.sciencedirect.com/science/article/pii/S0022053115001222
U2 - 10.1016/j.jet.2015.06.004
DO - 10.1016/j.jet.2015.06.004
M3 - Article
SN - 0022-0531
VL - 159
SP - 236
EP - 266
JO - Journal of Economic Theory
JF - Journal of Economic Theory
IS - A
ER -