Abstract

http://ssrn.com/abstract=2025996
 
 

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Entry, Imperfect Competition, and Futures Market for the Input


Georges Dionne


HEC Montreal - Department of Finance

Marc Santugini


HEC Montreal, Institute of Applied Economics; Centre Interuniversitaire sur le Risque, les Politiques Economiques et l'Emploi (CIRPÉE)

July 27, 2014

International Journal of Industrial Organization, 35(C):70-83, 2014.

Abstract:     
We analyze firms' entry, production and hedging decisions under imperfect competition. We consider an oligopoly industry producing a homogeneous output in which risk-averse firms face an entry cost upon entering the industry, and then compete in Cournot with one another. Each firm faces uncertainty in the input cost when making production decision, and has access to the futures market to hedge the random cost. We provide two sets of results. First, under general assumptions about risk preferences, demand, and uncertainty, we characterize the unique equilibrium. In contrast to previous results in the literature (without entry), both production and output price depend on uncertainty and risk aversion. Specifically, when entry is endogenized and the futures price is not actuarially fair, access to the futures market does not lead to separation. Second, to study the effect of access to the futures market on entry and production, we restrict attention to constant absolute risk aversion (CARA) preferences, a linear demand, and a normal distribution for the spot price. In general, the effect of access to the futures market on the number of firms and production is ambiguous.

The appendices for this paper are available at the following URL: http://ssrn.com/abstract=2450698

Number of Pages in PDF File: 50

Keywords: Cournot, Entry, Futures, Hedging, Imperfect Competition

JEL Classification: D21, D43, D80, G32, L13

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Date posted: March 20, 2012 ; Last revised: October 30, 2014

Suggested Citation

Dionne, Georges and Santugini, Marc, Entry, Imperfect Competition, and Futures Market for the Input (July 27, 2014). International Journal of Industrial Organization, 35(C):70-83, 2014.. Available at SSRN: http://ssrn.com/abstract=2025996 or http://dx.doi.org/10.2139/ssrn.2025996

Contact Information

Georges Dionne (Contact Author)
HEC Montreal - Department of Finance ( email )
3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada
514-340-6596 (Phone)
514-340-5019 (Fax)
HOME PAGE: http://www.hec.ca/gestiondesrisques/
Marc Santugini
HEC Montreal, Institute of Applied Economics ( email )
3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H2X 2L3
Canada
Centre Interuniversitaire sur le Risque, les Politiques Economiques et l'Emploi (CIRPÉE) ( email )
Pavillon De Sève
Ste-Foy, Quebec G1K 7P4
Canada
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