Allaz-Vila competition with non-linear costs or demands

Breitmoser, Yves (2012): Allaz-Vila competition with non-linear costs or demands.

Abstract

If Cournot oligopolists may sell their output prior to its production (forward trading), competition intensifies. Potentially, it may intensify so far as to imply convergence to the Bertrand equilibrium, as shown by Allaz and Vila (1993) for the case of linear demand and costs. The present paper analyzes the limiting outcome if demand or costs are non-linear, which still are open problems. Specifically, I consider a general family of convex demands and increasing marginal costs. In both cases, the limiting outcomes are strictly between Cournot and Bertrand. This shows that competitive futures markets improve welfare (upon Cournot) also for non-linear costs or demands, but they do generally not imply social efficiency.

• Item Type: MPRA Paper
• Language: English
• Keywords: forward trades, duopoly, quantity competition, convergence, Bertrand
• Subjects: D - Microeconomics > D4 - Market Structure, Pricing, and Design > D40 - General; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D43 - Oligopoly and Other Forms of Market Imperfection; C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C72 - Noncooperative Games

References

Allaz, B. (1987). Strategic forward transactions under imperfect competition: The duopoly case. Ph.D. thesis, Princeton University.

Allaz, B. (1992). Oligopoly, uncertainty and strategic forward transactions. International Journal of Industrial Organization, 10(2):297–308.

Allaz, B. and Vila, J.-L. (1993). Cournot competition, forward markets and efficiency. Journal of Economic Theory, 59(1):1–16.

Anderson, E. and Hu, X. (2008). Forward contracts and market power in an electricity market. International Journal of Industrial Organization, 26(3):679–694.

Benoit, J. and Krishna, V. (1985). Finitely repeated games. Econometrica, 53(4):905–922.

Bolle, F. (1993). Who profits from futures markets? ifo Studien, Zeitschrift für empirische Wirtschaftsforschung, 3–4:239–256.

Brandts, J., Pezanis-Christou, P., and Schram, A. (2008). Competition with forward contracts: a laboratory analysis motivated by electricity market design. The Economic Journal, 118(525):192–214.

Breitmoser, Y. (2012). On the endogeneity of Cournot, Bertrand, and Stackelberg competition in oligopolies. International Journal of Industrial Organization, 30:16–29.

Bushnell, J. (2007). Oligopoly equilibria in electricity contract markets. Journal of Regulatory Economics, 32(3):225–245.

Ferreira, J. (2003). Strategic interaction between futures and spot markets. Journal of Economic Theory, 108(1):141–151.

Ferreira, J., Kujal, P., and Rassenti, S. (2009). The strategic motive to sell forward: Experimental evidence. Working Paper 09-26, Universidad Carlos III de Madrid.

Genesove, D. and Mullin, W. (1998). Testing static oligopoly models: conduct and cost in the sugar industry, 1890-1914. RAND Journal of Economics, 29(2):355–377.

Hughes, J. and Kao, J. (1997). Strategic forward contracting and observability. International Journal of Industrial Organization, 16(1):121–133.

Le Coq, C. and Orzen, H. (2006). Do forward markets enhance competition? experimental evidence. Journal of Economic Behavior and Organization, 61(3):415–431.

Liski, M. and Montero, J. (2006). Forward trading and collusion in oligopoly. Journal of Economic Theory, 131(1):212–230.

Mahenc, P. and Salanié, F. (2004). Softening competition through forward trading. Journal of Economic Theory, 116(2):282–293.

Maskin, E. and Tirole, J. (2001). Markov perfect equilibrium I. Observable actions. Journal of Economic Theory, 100(2):191–219.

Powell, A. (1993). Trading forward in an imperfect market: The case of electricity in britain. The Economic Journal, 103(417):444–453.

Thille, H. (2003). Forward trading and storage in a Cournot duopoly. Journal of Economic Dynamics and Control, 27(4):651–665.