Forward Markets May Not Decrease Market Power When Capacities are Endogenous

CORE Discussion Paper No. 2005/28

42 Pages Posted: 27 Jan 2006

See all articles by Frederic Murphy

Frederic Murphy

Temple University - Department of Marketing and Supply Chain Management

Yves Smeers

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE)

Date Written: April 2005

Abstract

This paper analyzes the properties of three capacity games in an oligopolistic market with Cournot players. In the first game, capacity and the operation of that capacity is determined simultaneously. This is the classic open-loop Cournot game. In the second game capacity is decided in the first stage and the operation of that capacity is determined in the second stage. The first stage decision of each player is contingent on the solution of the second-stage game. This is a two-stage, closed-loop game. We show that when the solution exists, it is the same as the solution in the first game. However, it does not always exist. The third game has three stages with a futures position taken between the capacity stage and the operations stage and is also a closed-loop game. As with the second game, the equilibrium is the same as the open-loop game when it exists. However, the conditions for existence are more restrictive once a futures market is added. When both games have an equilibrium, the solution values are identical. The results are very different from games with no capacity stage as studied by Allaz and Vila (1993), which have been used to argue that futures markets can ameliorate market power.

Suggested Citation

Murphy, Frederic and Smeers, Yves, Forward Markets May Not Decrease Market Power When Capacities are Endogenous (April 2005). CORE Discussion Paper No. 2005/28, Available at SSRN: https://ssrn.com/abstract=878270 or http://dx.doi.org/10.2139/ssrn.878270

Frederic Murphy (Contact Author)

Temple University - Department of Marketing and Supply Chain Management ( email )

Philadelphia, PA 19122
United States

Yves Smeers

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE) ( email )

34 Voie du Roman Pays
B-1348 Louvain-la-Neuve, b-1348
Belgium

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
112
Abstract Views
825
Rank
441,967
PlumX Metrics