Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 1193: Market Power and Forward Prices

Keith Ruddell (), Tony Downward and Andy Philpott
Additional contact information
Keith Ruddell: Research Institute of Industrial Economics (IFN), Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden
Tony Downward: University of Auckland
Andy Philpott: University of Auckland

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

JEL-codes: D43; G13; L12; L13; Q41

8 pages, November 29, 2017

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