Do Firms Sell Forward for Strategic Reasons? An Application to the Wholesale Market for Natural Gas
41 Pages Posted: 7 Dec 2010
There are 2 versions of this paper
Do Firms Sell Forward for Strategic Reasons? An Application to the Wholesale Market for Natural Gas
Date Written: November 30, 2010
Abstract
Building on a model of the interaction of risk-averse firms that compete in forward and spot markets, we develop an empirical strategy to test whether oligopolistic firms use forward contracts for strategic motives, for risk-hedging, or for both. An increase in the number of players weakens the incentives to sell forward for risk-hedging reasons. However, if strategic motives are also relevant, then an increase in the number of players strengthens the incentives to sell forward. This difference provides the analyst with a way to identify whether strategic considerations are important at motivating firms to sell forward. Using data from the Dutch wholesale market for natural gas where we observe the number of players, spot and forward sales, and churn rates, we find evidence that strategic reasons play an important role at explaining the observed firms’ (inverse) hedge ratios. In addition, the data lend support to the existence of a learning effect by wholesalers.
Keywords: market power, risk-hedging, forward contracts, spot market, over-the-counter trade, market transparency, churn rates
JEL Classification: D43, L13, G13, L95
Suggested Citation: Suggested Citation
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Do Firms Sell Forward for Strategic Reasons? An Application to the Wholesale Market for Natural Gas
