Strategic Interaction Between Futures and Spot Markets
by
José Luis Ferreira
Universidad Carlos III de Madrid

There is a literature (e.g., Allaz and Vila, 1992 and Hughes and Kao, 1997) showing that in an oligopolistic context, the presence of a futures market induce firms to sell in this market, to increase its market share. The consequence of this behavior is that the total quantity supplied by the industry increases, thus making the oligopolistic outcome closer to the competitive equilibrium. In the present work, we propose a model to study the interaction of spot and futures markets that doesn't imply this pro-competitive effect. The model is the same as in Allaz and Vila in the sense that firms have infinitely many moments to trade in the futures market before the spot market takes place. We analyze the equilibria in the infinite case directly (as oppose to taking the limit of the finite cases) and show that many equilibria emerge in a kind of folk-theorem result (although ours is not a repeated game). The equilibrium in which firms do not use the forward market is particularly robust as it satisfy the most demanding definition of renegotiation-proofness. Furthermore, if firms are allowed to buy in the futures market, they can sustain the monopolistic outcome in a renegotiation-proof equilibrium. We also study the role of information in the model and argue that our results fit better stylized facts of some industries like the power market in the U.K.

Date received: June 20, 2000

Copyright © 2000 by the author(s). The author(s) of this document and the organizers of the conference have granted their consent to include this abstract in Atlas Conferences Inc. Document # cafk-27.