Forward Trading and Collusion of Firms in Volatile Markets

Abstract

Commodity markets are characterized by large volumes of forward contracts as well as high volatility. They are often accused of weak competitive pressure. This article extends the existing literature by analyzing tacit collusion of firms, forward trading and volatility simultaneously. The expected collusive profit may depart from the monopoly outcome in a volatile market (Rotemberg and Saloner, 1986). Introducing forward trading enables firms to gain the expected monopoly profit for a broader range of parameters. In contrast to a deterministic market (Liski an Montero, 2006), trading forward in a volatile market may lead to an expected collusive profit below the monopoly one.