Entry, Imperfect Competition, and Futures Market for the Input

50 Pages Posted: 20 Mar 2012 Last revised: 5 Jan 2023

See all articles by Georges Dionne

Georges Dionne

HEC Montreal - Department of Finance

Marc Santugini

University of Virginia - Department of Economics

Date Written: July 27, 2014

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.

The appendices for this paper are available at the following URL: http://ssrn.com/abstract=2450698

Keywords: Cournot, Entry, Futures, Hedging, Imperfect Competition

JEL Classification: D21, D43, D80, G32, L13

Suggested Citation

Dionne, Georges and Santugini, Marc, Entry, Imperfect Competition, and Futures Market for the Input (July 27, 2014). International Journal of Industrial Organization, 35(C):70-83, 2014., Available at SSRN: https://ssrn.com/abstract=2025996 or http://dx.doi.org/10.2139/ssrn.2025996

Georges Dionne (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada
514-340-6596 (Phone)
514-340-5019 (Fax)

HOME PAGE: http://www.hec.ca/gestiondesrisques/

Marc Santugini

University of Virginia - Department of Economics ( email )

P.O. Box 400182
Charlottesville, VA 22904-4182
United States

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