The strategic motive to sell forward: experimental evidence

We test the strategic motive to sell forward in experimental Cournot duopoly and quadropoly environments with either a finite (exogenous close) or an infinite (endogenous close) number of forward markets. In the exogenous close case experienced subjects do not avail themselves of the forward markets and production mostly occurs in the spot market phase. In a forward market duopoly experienced subjects achieve nearly the monopoly output level. For the quadropoly output levels are more competitive and are near the Cournot Nash equilibrium. In both cases output produced is much less than the Allaz-Vila (1993) prediction. The results with inexperienced subjects, however, are in line with theory and as reported in Le-Coq and Orzen (2006). We implement the case of infinitely many forward periods using the endogenous close rule. In this case the results both for a forward market duopoly and quadropoly are much more competitive both with inexperienced and experienced subjects. Unlike the exogenous stopping rule, under the endogenous rule subjects sell forward in the forward markets and find it hard to coordinate their actions.

[1]  James Bushnell,et al.  Vertical Arrangements, Market Structure, and Competition an Analysis of Restructured U.S. Electricity Markets , 2007 .

[2]  Henrik Orzen,et al.  Do forward markets enhance competition?: Experimental evidence , 2006 .

[3]  Juan-Pablo Montero,et al.  Forward trading and collusion in oligopoly , 2006, J. Econ. Theory.

[4]  Frederic H. Murphy,et al.  Generation Capacity Expansion in Imperfectly Competitive Restructured Electricity Markets , 2005, Oper. Res..

[5]  P. Mahenc,et al.  Softening competition through forward trading , 2004, J. Econ. Theory.

[6]  Jörg Oechssler,et al.  Two are few and four are many: number effects in experimental oligopolies , 2004 .

[7]  Jordi Brandts,et al.  Centre De Referència En Economia Analítica Barcelona Economics Working Paper Series Working Paper Nº 66 Competition with Forward Contracts: a Laboratory Analysis Motivated by Electricity Market Design Competition with Forward Contracts: a Laboratory Analysis Motivated by Electricity Market Design* B , 2022 .

[8]  José Luis Ferreira,et al.  Strategic interaction between futures and spot markets , 2003, J. Econ. Theory.

[9]  P. Bó.  Cooperation under the Shadow of the Future: Experimental Evidence from Infinitely Repeated Games , 2005 .

[10]  José Luis Ferreira,et al.  The Role of Observability in Futures Markets , 2001 .

[11]  F. Wolak.  An Empirical Analysis of the Impact of Hedge Contracts on Bidding Behavior in a Competitive Electricity Market , 2000 .

[12]  R. Nagel,et al.  Inexperienced and experienced players in an oligopolistic market game with minimal information , 1999 .

[13]  A. Dilger.  The absent-minded prisoner , 2006 .

[14]  David M Newbery,et al.  Competition, Contracts, and Entry in the Electricity Spot Market , 1998 .

[15]  Joshua S. Gans,et al.  Contracts and Electricity Pool Prices , 1998 .

[16]  John S. Hughes,et al.  Strategic forward contracting and observability , 1997 .

[17]  S. Rassenti,et al.  Cotenancy and competition in an experimental auction market for natural gas pipeline networks , 1994 .

[18]  Blaise Allaz,et al.  Cournot Competition, Forward Markets and Efficiency , 1993 .

[19]  Blaise Allaz,et al.  Oligopoly, uncertainty and strategic forward transactions , 1992 .

[20]  D. Fudenberg,et al.  Subgame-perfect equilibria of finite- and infinite-horizon games , 1981 .

[21]  R. Radner.  Collusive behavior in noncooperative epsilon-equilibria of oligopolies with long but finite lives , 1980 .