SSE/EFI Working Paper Series in Economics and Finance
No 506:
Do Forward Markets Enhance Competition? Experimental Evidence
Chloé Le Coq ()
and Henrik Orzen ()
Abstract: Hedging risks is an important rationale for the existence
of forward markets. However, Allaz and Vila (1993) show that duopolists can
also have a strategic motive to sell forward, irrespective of exogenous
uncertainties. Moreover, in their model the possibility of forward trading
increases competitiveness between the two firms, raising consumer surplus
and welfare. In this study we analyze the case of an n firm oligopoly in
Allaz’ and Vila’s framework and derive comparative static predictions with
regard to the market institution and the number of competitors. We then
test the theoretical hypotheses in a laboratory experiment. Our findings
support the main comparative-static predictions of the model but also
suggest that, when compared to the increase in competitive pressure due to
entry, the competition-enhancing effect of a forward market is weaker than
predicted.
Keywords: Cournot Competition; Forward Markets; Spot Markets; Experiments; (follow links to similar papers)
JEL-Codes: C72; C92; D43; L13; (follow links to similar papers)
38 pages, August 22, 2002, Revised October 1, 2004
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