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Pairwise forward trading and bilateral oligopoly

Van Moer, Geert (2019): Pairwise forward trading and bilateral oligopoly.

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Abstract

This paper investigates pairwise efficient forward trading followed by spot market competition. The model finds that forward trading rules out a “bilateral oligopoly” spot market where at least one net seller under-supplies and least one net buyer under-procures. If not, both firms, by exercising market power, would hurt each other, a negative externality problem which can be mitigated by pairwise forward trading. Next, a configuration is analyzed where firms’ marginal costs increase linearly with slopes inversely related to their capacities. It is shown that assuming market shares equal capacity shares overstates the Hirschman-Herfindahl Index, a result useful for merger evaluation.

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