Increasing marginal costs are strategically beneficial in forward trading

Yves Breitmoser ()

Economics Letters, 2013, vol. 119, issue 2, 109-112

Abstract: The possibility of forward trading has been shown to restore social efficiency in Cournot oligopolies if marginal costs are constant. The paper analyzes the more general case that marginal costs are non-decreasing. I show that increasing marginal costs diminish the “strategic substitutability” between firms’ quantities, i.e. firms react less to quantity changes of opponents, and that this prevents convergence to social efficiency. Thus, increasing marginal costs have a competition-reducing effect in forward trading, and this effect is so strong that equilibrium prices may even increase after cost reductions—when the cost curvature increases simultaneously. This also shows that competition by forward trading differs qualitatively from both Cournot and Bertrand competition.

Keywords: Forward trading; Duopoly; Social efficiency; Cournot; Bertrand (search for similar items in EconPapers)
JEL-codes: C72 D40 D43 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:119:y:2013:i:2:p:109-112

DOI: 10.1016/j.econlet.2013.01.030

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