Forward Trading and Collusion in Supply Functions
31 Pages Posted: 19 Feb 2019
Date Written: 2019
This paper studies the effect of forward contracts on the stability of collusion among firms, competing in supply functions on the spot market. A forward market can increase the range of discount factors which allow to sustain collusion. On the contrary, collusion is destabilised when a potential deviator sells a significant amount forward. Results do not depend on the type (financial or physical) of contract fulfilment and are robust to different levels of demand uncertainty. As a policy implication, the study finds that liquid and anonymous forward markets are incompatible with collusion.
Keywords: forward trading; collusion; supply function equilibrium
JEL Classification: C73, D43, L13, G13
Suggested Citation: Suggested Citation