Relaxing competition through speculation: Committing to a negative supply slope

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractWe demonstrate how suppliers can take strategic speculative positions in derivatives markets to soften competition in the spot market. In our game, suppliers rst choose a portfolio of call options and then compete with supply functions. In equilibrium rms sell forward contracts and buy call options to commit to downward sloping supply functions. Although this strategy is risky, it reduces the elasticity of the residual demand of competitors, who increase their mark-ups in response. We show that this type of strategic speculation increases the level and volatility of commodity prices and decreases welfare.

Optimal Price Design in the Wholesale Electricity Market

“…For recent analysis of market power and congestion in the Italian market, see Bigerna et al (2016). For a theoretical justification of the violation of the positive supply slope condition, see Holmberg and Willems (2015).…”

Market Structure, Risk Preferences, and Forward Contracting Incentives*

“…5 Forward contracting has also been shown to provide strategic advantages for generators by enhancing their incentives to expand their wholesale output (for the reasons explained above). Allaz and Vila [1993]'s seminal analysis of Cournot competition among generators has been extended to consider alternative forms of market competition (Green [1999]; Holmberg [2011]; Holmberg and Willems [2015]) and to examine the robustness of Allaz and Vila's insight to other variations in model assumptions (de Frutos and Fabra [2012]; Green and Le Coq [2010]; Ito and Reguant [2016]; Montero [2006, 2014]; Mahenc and Salanie [2004]). Empirical studies document the strategic effects of forward contracting in several markets, including natural gas and electricity markets (Bushnell et al [2008]; van Eijkel et al [2016]; Wolak [2000]).…”

Load-Following Forward Contracts

“…The author finds that, in equilibrium, call options enhance the pro-competitive effect of forward contracts. 8 Holmberg and Willems (2015) allow firms to choose SFCs and a portfolio of call options before competing via supply functions in the wholesale market. In this setting, firms commit to produce less output as the prevailing wholesale price increases.…”