Entry, imperfect competition, and futures market for the input

Georges Dionne () and Marc Santugini ()
Additional contact information
Marc Santugini: University of Virginia

No 12-5, Working Papers from HEC Montreal, Canada Research Chair in Risk Management

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 incur a sunk 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 its 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), production and output price depend on uncertainty and risk aversion. In other words, when entry is endogenized, 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 input price. In general, the effect of access to the futures market on the number of firms and production is ambiguous. However, when the values of the model parameters lead to partial hedging, the effect is unambiguous. Under partial hedging, access to the futures market induces more firms to enter the market and each one of them to produce more.

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)
Pages: 63 pages
Date: 2013-10-21
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Entry, imperfect competition, and futures market for the input (2014)
Working Paper: Entry, Imperfect Competition, and Futures Market for the Input (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:crcrmw:2012_005

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