Relaxing competition through speculation: Committing to a negative supply slope

Pär Holmberg and Bert Willems

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: We demonstrate how suppliers can take strategic speculative positions in derivatives markets to soften competition in the spot market. In our game, suppliers first choose a portfolio of call options and then compete with supply functions. In equilibrium firms sell forward contracts and buy call options to commit to downward sloping supply functions. Although this strategy is risky, it reduces the elasticity of the residual demand of competitors, who increase their mark-ups in response. We show that this type of strategic speculation increases the level and volatility of commodity prices and decreases welfare.

Keywords: Supply function equilibrium; Option contracts; Strategic commitment (search for similar items in EconPapers)
JEL-codes: C73 D43 D44 G13 L13 L94 (search for similar items in EconPapers)
Date: 2012-12-19
New Economics Papers: this item is included in nep-com and nep-cse
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https://www.econ.cam.ac.uk/sites/default/files/pub ... pe-pdfs/cwpe1252.pdf

Related works:
Journal Article: Relaxing competition through speculation: Committing to a negative supply slope (2015)
Working Paper: Relaxing competition through speculation: Committing to a negative supply slope (2015)
Working Paper: Relaxing competition through speculation: Committing to a negative supply slope (2012)
Working Paper: Relaxing Competition through Speculation: Committing to a Negative Supply Slope (2012)
Working Paper: Relaxing Competition through Speculation: Committing to a Negative Supply Slope (2012)
Working Paper: Relaxing Competition through Speculation: Committing to a Negative Supply Slope (2012)
Working Paper: Relaxing Competition through Speculation: Committing to a Negative Supply Slope (2012)
Working Paper: Relaxing Competition through Speculation: Committing to a Negative Supply Slope (2012)
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