Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/81479
Authors: 
Holmberg, Pär
Willems, Bert
Year of Publication: 
2012
Series/Report no.: 
IFN Working Paper 937
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.
Subjects: 
Supply function equilibrium
Option contracts
Strategic commitment
Speculation
JEL: 
C73
D43
D44
G13
L13
L94
Document Type: 
Working Paper

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