Post by Sapphire Capital on Aug 16, 2010 7:38:50 GMT 4
Exclusion Through Speculation
Cédric Argenton
Tilburg Law and Economics Center (TILEC); Tilburg University - Center and Faculty of Economics and Business Administration
Bert Willems
Center & TILEC, Tilburg University
July 30, 2010
TILEC Discussion Paper No. 2010-027
Abstract:
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.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1651112_code524065.pdf?abstractid=1651112&mirid=2
Cédric Argenton
Tilburg Law and Economics Center (TILEC); Tilburg University - Center and Faculty of Economics and Business Administration
Bert Willems
Center & TILEC, Tilburg University
July 30, 2010
TILEC Discussion Paper No. 2010-027
Abstract:
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.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1651112_code524065.pdf?abstractid=1651112&mirid=2