Relaxing Competition through Speculation: Committing to a Negative Supply Slope

Pär Holmberg and Bert Willems

No 937, Working Paper Series from Research Institute of Industrial Economics

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; Speculation (search for similar items in EconPapers)
JEL-codes: C73 D43 D44 G13 L13 L94 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2012-11-07
References: Add references at CitEc
Citations:

Published as Holmberg, Pär and Bert Willems, 'Relaxing Competition through Speculation: Committing to a Negative Supply Slope' in Journal of Economic Theory, 2015, pages 236-266.

Downloads: (external link)
https://www.ifn.se/wfiles/wp/wp937.pdf (application/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 (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)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hhs:iuiwop:0937

Access Statistics for this paper

More papers in Working Paper Series from Research Institute of Industrial Economics Research Institute of Industrial Economics, Box 55665, SE-102 15 Stockholm, Sweden. Contact information at EDIRC.
Bibliographic data for series maintained by Elisabeth Gustafsson ().