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Research Institute of Industrial Economics (IFN) Working Paper Series

No 1193:
Market Power and Forward Prices

Keith Ruddell (), Tony Downward and Andy Philpott

Abstract: We construct a model of strategic behavior in sequential markets which exhibits a persistent forward price premium. On the spot market, producers wield market power while purchasers are price takers. Producers with forward commitments have less incentive to raise prices on the spot market. Purchasers are thus willing to pay a premium to producers for forward contracts. We argue that this type of forward premium is not susceptible to arbitrage by speculators on the forward market, since purchasers prefer forward contracts backed by producers.

Keywords: Forward pricing; Electricity markets; Market power; Arbitrage; (follow links to similar papers)

JEL-Codes: D43; G13; L12; L13; Q41; (follow links to similar papers)

8 pages, November 29, 2017

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