Softening competition through forward trading

Abstract

In the history of alleged manipulations on forward markets, it has been observed that high prices resulted from a cartel's long positions. The present paper addresses this issue in a simple model of price setting duopolists. We show that forward trading results in producers buying forward their own production, so that equilibrium prices are increased compared to the case without forward trading. This result contrasts with the social desirability of forward markets emphasized by the academic literature.

Exclusion Through Speculation

“…9 Willems (2005) shows that those results also hold for option contracts. On the other hand, if oligopolists compete à la Bertrand, then they have an incentive to buy forward contracts, and commit to being less aggressive (Mahenc and Salanié, 2004). 10 We show that even under price competition, financial instruments can be used by an incumbent to increase the intensity of competition but with deleterious effects on entry incentives.…”

Relaxing competition through speculation: Committing to a negative supply slope

“…when an aggressive commitment results in an aggressive spot market response from competitors. Mahenc and Salanié (2004) analyze a market with di erentiated goods and price competition, and show that a commitment to low mark-ups, due to forward sales, is met with a tough response, that is competitors also lower their mark-ups. To avoid the tough response, rms buy in the forward market (negative contracting) in order to soften competition in the spot market.…”

Anti-Competitive Exclusion and Market Division Through Loyalty Discounts

“…If the incumbent chooses its price to free buyers,   , first, then the entrant will either choose to price at   = {      } -selling only to uncovered buyers-or the entrant will choose 22 If the first buyer to sign believes that her signing will induce all the others to sign, but that none will sign if she does not, then her lost consumer surplus from signing is exactly () − (   ) All subsequent buyers have a smaller lost consumer surplus since even if all later buyers reject, the price will be elevated above  due to the earlier buyers being covered. Thus, () − (   ) is an upper bound on the lost consumer surplus per buyer.…”

“…In contrast, by considering simultaneous pricing, we find that given a sufficient number of buyers (in our linear demand analysis, "sufficient" can mean three buyers), 8 Our paper also shares some similarities with papers that study the interaction between financial markets and product markets. For example, Mahenc and Salanie (2004) show that sellers can commit themselves to higher prices by taking a long position in their product in the forward market. This induces their rival to also price higher, resulting in higher profits for both and lower social welfare.…”