Forward Contracts, Market Structure, and the Welfare Effects of Mergers

43 Pages Posted: 6 Oct 2017

See all articles by Nathan Miller

Nathan Miller

Georgetown University - Robert Emmett McDonough School of Business

Joseph Podwol

Antitrust Division, U.S. Department of Justice

Date Written: October 4, 2017

Abstract

We examine how forward contracts affect economic outcomes under generalized market structures. In the model, forward contracts discipline the exercise of market power by making profit less sensitive to changes in output. This impact is greatest in markets with intermediate levels of concentration. Mergers reduce the use of forward contracts in equilibrium and, in markets that are sufficiently concentrated, this amplifies the adverse effects on consumer surplus. Additional analyses of merger profitability and collusion are provided. Throughout, we illustrate and extend the theoretical results using Monte Carlo simulations. The results have practical relevance for antitrust enforcement.

Keywords: Forward Contracts, Hedging, Mergers, Antitrust Policy

JEL Classification: L13, L41, L44

Suggested Citation

Miller, Nathan and Podwol, Joseph, Forward Contracts, Market Structure, and the Welfare Effects of Mergers (October 4, 2017). Georgetown McDonough School of Business Research Paper No. 3048288. Available at SSRN: https://ssrn.com/abstract=3048288 or http://dx.doi.org/10.2139/ssrn.3048288

Nathan Miller (Contact Author)

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States

Joseph Podwol

Antitrust Division, U.S. Department of Justice ( email )

202-598-2866 (Phone)

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