Duopoly, Inventories and Futures Markets

Inventories, market structure, and price volatility

“…If the equilibrium strategies are linear in the demand and cost shocks (as is the case if the game is linear-quadratic), then this implies that sales will equal the Cournot level on average and storage then has no effect on the level of prices. Even for a non-linear-quadratic game, prices will equal the Cournot price if there is no uncertainty, so the prediction of the two-period game of Allaz (1991) that storage results in lower prices does not survive the extension to an infinite horizon. It is not surprising that the equilibrium differs from the two period one, but it is interesting that the effect of storage on price disappears entirely in this case, since this has been found not always to be the case in other games.…”

“…Allaz (1991) shows that the possibility of storage results in lower prices than is the case if storage were not possible. Producers wish to have lower costs than their rival in the second period and in the attempt to gain such an advantage invest in inventories which result in higher second period sales and lower price.…”

On Storage Behavior Under Imperfect Competition, with Application to the American Cheese Market

“…Such a bias stresses the need to consider longer planning horizons. This seems relevant since two-period models have been commonly used in the investigation of non-competitive storage (e.g., Allaz 1991;Arvan 1985;Mitraille 2004;Mollgaard et al 2000;Rotemberg and Saloner 1989;Saloner 1986).…”

“…In the context of a Cournot duopoly game, Arvan (1985) has shown that the equilibrium inventory strategies may not be symmetric and may not even exist. Also, researchers have often focused on two-period models (e.g., Allaz 1991;Arvan 1985;Mitraille 2004;Mollgaard et al 2000;Rotemberg and Saloner 1989;Saloner 1986). We argue below that two-period models impose undue restrictions on storage behavior under imperfect competition.…”

“…The analysis of non-competitive storage has been investigated by Allaz (1991); Arvan (1985); Judd (1996); Kirman and Sobel (1974); McLaren (1999); Mitraille (2004); Mollgaard et al (2000); Newbery (1984); Rotemberg and Saloner (1989); Saloner (1986); Vedenov and Miranda (2001), and Williams and Wright (1991). In general, non-competitive storage behavior can be complex.…”