A capacitated commodity trading model with market power

Victor Martínez de Albeniz () and Josep M. Vendrell
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Victor Martínez de Albeniz: IESE Business School, Postal: Research Division, Av Pearson 21, 08034 Barcelona, SPAIN
Josep M. Vendrell: IESE Business School, Postal: Research Division, Av Pearson 21, 08034 Barcelona, SPAIN

No D/728, IESE Research Papers from IESE Business School

Abstract: In this paper we consider the problem of a trader who purchases a commodity in one market and resells it in another. The trader is capacitated: the trading volume is limited by operational constraints, e.g., logistics. The two markets quote different prices, but the spread is reduced when trading takes place. We are interested in finding the optimal trading policy across the markets so as to obtain the maximum profit in the long-term, taking into account that the trading activity influences the price processes, i.e., market power. As in the no-market-power case, we find that the optimal policy is determined by three regions, where 1) move as much as possible from one market to the other; 2) the same in the opposite direction; or 3) do nothing. Finally, we use the model to analyze kerosene price differences between New York and Los Angeles.

Keywords: commodity trading; price processes; inventory management (search for similar items in EconPapers)
Pages: 38 pages
Date: 2008-01-07
New Economics Papers: this item is included in nep-com, nep-mic and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:ebg:iesewp:d-0728

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