Do Firms Sell Forward for Strategic Reasons? An Application to the Wholesale Market for Natural Gas

41 Pages Posted: 7 Dec 2010

See all articles by Remco van Eijkel

Remco van Eijkel

University of Groningen

José L. Moraga-González

VU University Amsterdam; University of Groningen

Multiple version iconThere are 2 versions of this paper

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

van Eijkel, Remco and Moraga-Gonzalez, Jose Luis, Do Firms Sell Forward for Strategic Reasons? An Application to the Wholesale Market for Natural Gas (November 30, 2010). CESifo Working Paper Series No. 3270, Available at SSRN: https://ssrn.com/abstract=1720815

Remco Van Eijkel

University of Groningen ( email )

P.O. Box 800
9700 AH Groningen, Groningen 9700 AV
Netherlands

Jose Luis Moraga-Gonzalez (Contact Author)

VU University Amsterdam ( email )

De Boelelaan 1105
1081 HV Amsterdam
Netherlands

HOME PAGE: http://www.tinbergen.nl/~moraga/

University of Groningen

P.O. Box 800
9700 AV Groningen, Groningen 9700 AV
Netherlands

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