Forward Markets and Signals of Quality

Philippe Mahenc and Valerie Meunier ()

RAND Journal of Economics, 2003, vol. 34, issue 3, 478-94

Abstract: We analyze how information about quality may be conveyed via forward trading. A privately informed monopolist has the opportunity to make forward sales. Speculators and consumers, participating in the forward and the spot markets respectively, observe the monopolist's decisions in these markets. We show that forward trading may emerge in equilibrium although the monopolist has neither insurance nor hedging incentives. Indeed, the high-quality monopolist uses forward trading to reduce the cost of signalling quality through spot prices. We conclude that forward trading indirectly contributes to signal quality more efficiently in the spot market. Copyright 2003 by the RAND Corporation.

Date: 2003
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