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Do firms sell forward for strategic reasons? An application to the wholesale market for natural gas

Remco van Eijkel, Gerard Kuper () and José L. Moraga-González

International Journal of Industrial Organization, 2016, vol. 49, issue C, 1-35

Abstract: Cournot models of oligopolistic interaction in forward and spot markets have shown that firms may sell forward for risk-hedging reasons only, or for both risk-hedging and strategic considerations. Using data from the Dutch wholesale market for natural gas where we observe the number of players, spot and forward sales, churn rates and prices, this paper presents evidence that strategic reasons play an important role at explaining the observed firms’ hedging activity. Our test for strategic behavior is based on the theoretical relationship between the number of sellers and the incentives to sell forward: if risk-hedging is the only motive behind firms’ decision to sell forward, then hedging activity ought to decrease in the number of firms; otherwise, if strategic reasons are relevant, then firms incentives to sell forward should increase in the number of competitors.

Keywords: Forward contracts; Risk-hedging; Strategic contracting; Market power; Spot market; Churn rates (search for similar items in EconPapers)
JEL-codes: D43 L13 G13 L95 (search for similar items in EconPapers)
Date: 2016
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