Working Paper No. 1193

Market Power and Forward Prices

Published: November 29, 2017Pages: 8Keywords: Forward pricing; Electricity markets; Market power; ArbitrageJEL-codes: D43; G13; L12; L13; Q41

Market Power and Forward Prices Keith Ruddell, Tony Downward and Andy Philpott


We construct a model of strategic behavior in sequential markets which exhibits a persistent forward price premium. On the spot market, producers wield market power while purchasers are price takers.

Producers with forward commitments have less incentive to raise prices on the spot market. Purchasers are thus willing to pay a premium to producers for forward contracts.

We argue that this type of forward premium is not susceptible to arbitrage by speculators on the forward market, since purchasers prefer forward contracts backed by producers.

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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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