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Title:Do forward markets enhance competition? Experimental evidence PDF Logo
Authors:Le Coq, Chloé
Orzen, Henrik
Issue Date:2002
Series/Report no.:SSE/EFI Working Paper Series in Economics and Finance 506
Abstract:Hedging risks is an important rationale for the existence of forward markets. However, Allaz and Vila (1993) show that duopolists can also have a strategic motive to sell forward, irrespective of exogenous uncertainties. Moreover, in their model the possibility of forward trading increases competitiveness between the two firms, raising consumer surplus and welfare. In this study we analyze the case of an n firm oligopoly in Allaz' and Vila's framework and derive comparative static predictions with regard to the market institution and the number of competitors. We then test the theoretical hypotheses in a laboratory experiment. Our findings support the main comparative-static predictions of the model but also suggest that, when compared to the increase in competitive pressure due to entry, the competition-enhancing effect of a forward market is weaker than predicted.
Subjects:Cournot Competition
Forward Markets
Spot Markets
Experiments
JEL:C72
C92
D43
L13
Document Type:Working Paper
Appears in Collections:SSE/EFI Working Paper Series in Economics and Finance, EFI - The Economic Research Institute, Stockholm School of Economics

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