Working Paper Series
Market Power and Forward Prices
(), 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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