Exclusion Through Speculation
CentER Discussion Paper No. 2010-83
28 Pages Posted: 2 Aug 2010 Last revised: 24 Jun 2013
Date Written: July 29, 2010
Many commodities are traded on both a spot market and a derivative market. We show that an incumbent producer may use financial derivatives to extract rent from a potential entrant. The incumbent can indeed sell insurance to a large buyer to commit himself to compete aggressively in the spot market and drive the price down for the entrant. It can do so by selling derivatives for more than his expected production level, i.e. by taking a speculative position. This comes at the cost of inefficiently deterring entry.
Keywords: exclusion, monopolization, contracts, financial contracts, derivatives, risk aversion, speculation
JEL Classification: D43, D86, K21, L12, L42
Suggested Citation: Suggested Citation