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Entry, Imperfect Competition, and Futures Market for the Input

Georges Dionne and Marc Santugini

Cahiers de recherche from CIRPEE

Abstract: We analyze firms’ entry, production and hedging decisions under imperfect competition. We consider an oligopoly industry producing a homogeneous output in which risk-averse firms face an entry cost upon entering the industry, and then compete in Cournot with one another. Each firm faces uncertainty in the input cost when making production decision, and has access to the futures market to hedge the random cost. We provide two sets of results. First, under general assumptions about risk preferences, demand, and uncertainty, we characterize the unique equilibrium. In contrast to previous results in the literature (without entry), both production and output price depend on uncertainty and risk aversion. Specifically, when entry is endogenized and the futures price is not actuarially fair, access to the futures market does not lead to separation. Second, to study the effect of access to the futures market on entry and production, we restrict attention to constant absolute risk aversion (CARA) preferences, a linear demand, and a normal distribution for the spot price. In general, the effect of access to the futures market on the number of firms and production is ambiguous.

Keywords: Cournot; Entry; Futures; Hedging; Imperfect competition (search for similar items in EconPapers)
JEL-codes: D21 D43 D80 G32 L13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec and nep-com
Date: 2012
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Journal Article: Entry, imperfect competition, and futures market for the input (2014) Downloads
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