Working Paper No. 937

Relaxing Competition through Speculation: Committing to a Negative Supply Slope

Published: November 7, 2012Pages: 32Keywords: Supply function equilibrium; Option contracts; Strategic commitment; SpeculationJEL-codes: C73; D43; D44; G13; L13; L94
Published version

Relaxing Competition through Speculation: Committing to a Negative Supply Slope Pär Holmberg and Bert Willems


We demonstrate how suppliers can take strategic speculative positions in derivatives markets to soften competition in the spot market. In our game, suppliers first choose a portfolio of call options and then compete with supply functions. In equilibrium firms sell forward contracts and buy call options to commit to downward sloping supply functions. Although this strategy is risky, it reduces the elasticity of the residual demand of competitors, who increase their mark-ups in response. We show that this type of strategic speculation increases the level and volatility of commodity prices and decreases welfare.

Pär Holmberg

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Martin Ljunge, IFN, is the author of a chapter, "Trust promotes health: addressing reverse causality by studying children of immigrants", in a new book edited by Sherman Folland and Eric Nauenberg. The cutting edge of research is presented, covering the ever-expanding social capital field.

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