Competition with forward contracts: a laboratory analysis motivated by electricity market design

Authors: Brandts, Jordi¹; Pezanis-Christou, Paul²; Schram, Arthur³

Source: The Economic Journal, Volume 118, Number 525, January 2008 , pp. 192-214(23)

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Abstract:

We use experiments to study the efficiency effects of adding the possibility of forward contracting to a spot market. We focus on the strategic implications of a forward market and consider both quantity and supply function competition. In both cases we compare the effect of adding a contract market to the introduction of an additional competitor. We find that, as theory suggests, for both types of competition the introduction of a forward market significantly lowers prices. The combination of supply function competition with a forward market leads to high efficiency levels.

Document Type: Research article

DOI: 10.1111/j.1468-0297.2007.02109.x

Affiliations: 1: Institut d'Anàlisi Econòmica (CSIC), 2: B.E.T.A., Université Louis Pasteur, Strasbourg I 3: CREED, Universiteit van Amsterdam