2018
DOI: 10.1016/j.econlet.2018.02.016
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Market power and forward prices

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 forwar… Show more

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Cited by 7 publications
(2 citation statements)
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“…Also they focus on a centralized auction (a futures exchange) as opposed to decentralized bilateral contracting. Anderson and Hu [2008] and Ruddell et al [2018] reveal incentives for a producer and nonstrategic retailer to sign a forward contract that mitigates the producer's markup, in models where contracts are publicly observable. Adilov [2010] studies a different model of bilateral contracting whereby infinitesimally small buyers rely on historic prices to form expectations.…”
Section: Introductionmentioning
confidence: 99%
“…Also they focus on a centralized auction (a futures exchange) as opposed to decentralized bilateral contracting. Anderson and Hu [2008] and Ruddell et al [2018] reveal incentives for a producer and nonstrategic retailer to sign a forward contract that mitigates the producer's markup, in models where contracts are publicly observable. Adilov [2010] studies a different model of bilateral contracting whereby infinitesimally small buyers rely on historic prices to form expectations.…”
Section: Introductionmentioning
confidence: 99%
“…[13] for the Colombian electricity market; Ref. [14] for the European Electricity Exchange (EEX); and [15] for the British electricity market [16]. The incorporation of an FRP immediately leads to a difference between the forward price and the spot price expectations.…”
Section: Introductionmentioning
confidence: 99%