Relaxing competition through speculation: Committing to a negative supply slope

Holmberg, Pär; Willems, Bert

Relaxing competition through speculation: Committing to a negative supply slope

Journal of Economic Theory, 2015, vol. 159, issue PA, 236-266

Abstract: We demonstrate how commodity producers can take strategic speculative positions in derivatives markets to soften competition in the spot market. In our game, producers first choose a portfolio of call options and then compete in supply functions. In equilibrium, producers sell forward contracts and buy call options to commit to downward sloping supply functions. Although this strategy is risky, it is profitable because it reduces the elasticity of the residual demand of competitors who respond by increasing mark-ups.

Keywords: Supply function equilibrium; Option contracts; Strategic commitment (search for similar items in EconPapers)
JEL-codes: C73 D43 G13 L13 L94 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:159:y:2015:i:pa:p:236-266

DOI: 10.1016/j.jet.2015.06.004

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