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Do Firms Sell Forward for Strategic Reasons? An Application to the Wholesale Market for Natural Gas

Author

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  • Remco van Eijkel
  • José Luis Moraga Gonzalez
Abstract
Building on a model of the interaction of risk-averse firms that compete in forward and spot markets, we develop an empirical strategy to test whether oligopolistic firms use forward contracts for strategic motives, for risk-hedging, or for both. An increase in the number of players weakens the incentives to sell forward for risk-hedging reasons. However, if strategic motives are also relevant, then an increase in the number of players strengthens the incentives to sell forward. This difference provides the analyst with a way to identify whether strategic considerations are important at motivating firms to sell forward. Using data from the Dutch wholesale market for natural gas where we observe the number of players, spot and forward sales, and churn rates, we find evidence that strategic reasons play an important role at explaining the observed firms’ (inverse) hedge ratios. In addition, the data lend support to the existence of a learning effect by wholesalers.

Suggested Citation

  • Remco van Eijkel & José Luis Moraga Gonzalez, 2010. "Do Firms Sell Forward for Strategic Reasons? An Application to the Wholesale Market for Natural Gas," CESifo Working Paper Series 3270, CESifo.
    • Handle: RePEc:ces:ceswps:_3270
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    Full references (including those not matched with items on IDEAS)

    Citations

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    2. Weigt, H. & Willems, Bert, 2011. "The Effect of Divestitures in the German Electricity Market," Other publications TiSEM 7bbea5b0-7489-416f-8767-d, Tilburg University, School of Economics and Management.
    3. Bohland, Moritz & Schwenen, Sebastian, 2022. "Renewable support and strategic pricing in electricity markets," International Journal of Industrial Organization, Elsevier, vol. 80(C).
    4. van Koten, Silvester & Ortmann, Andreas, 2013. "Structural versus behavioral remedies in the deregulation of electricity markets: An experimental investigation motivated by policy concerns," European Economic Review, Elsevier, vol. 64(C), pages 256-265.
    5. David P. Brown & Andrew Eckert, 2017. "Electricity market mergers with endogenous forward contracting," Journal of Regulatory Economics, Springer, vol. 51(3), pages 269-310, June.
    6. Moritz Bohland & Sebastian Schwenen, 2020. "Technology Policy and Market Structure: Evidence from the Power Sector," Discussion Papers of DIW Berlin 1856, DIW Berlin, German Institute for Economic Research.
    7. David P. Brown & David E. M. Sappington, 2023. "Employing gain-sharing regulation to promote forward contracting in the electricity sector," Journal of Regulatory Economics, Springer, vol. 63(1), pages 30-56, April.
    8. Chloé Le Coq & Sebastian Schwenen, 2020. "Financial contracts as coordination device," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 29(2), pages 241-259, April.
    9. Motta, Massimo & Hansen, Stephen, 2012. "Vertical Exclusion with Endogenous Competiton Externalities," CEPR Discussion Papers 8982, C.E.P.R. Discussion Papers.
    10. David P. Brown & Andrew Eckert, 2018. "Analyzing the Impact of Electricity Market Structure Changes and Mergers: The Importance of Forward Commitments," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 52(1), pages 101-137, February.
    11. David P. Brown & Andrew Eckert & Douglas Silveira, 2023. "Strategic interaction between wholesale and ancillary service markets," Competition and Regulation in Network Industries, , vol. 24(4), pages 174-198, December.
    12. David P. Brown & David E. M. Sappington, 2023. "Load-Following Forward Contracts," The Energy Journal, , vol. 44(3), pages 187-222, May.
    13. Argenton, Cédric & Willems, Bert, 2015. "Exclusion through speculation," International Journal of Industrial Organization, Elsevier, vol. 39(C), pages 1-9.
    14. Linda Cohen & Amihai Glazer, 2014. "Forward Markets to Spur Innovation," Working Papers 131405, University of California-Irvine, Department of Economics.
    15. Van Moer, Geert, 2019. "Electricity market competition when forward contracts are pairwise efficient," MPRA Paper 96660, University Library of Munich, Germany.
    16. Aichele, Markus, 2014. "Strategic investment, forward markets and competition," University of Tübingen Working Papers in Business and Economics 76, University of Tuebingen, Faculty of Economics and Social Sciences, School of Business and Economics.
    17. Spindler, Christian & Woll, Oliver & Schober, Dominik, 2018. "Sharing is not caring: Backward integration of consumers," ZEW Discussion Papers 18-006, ZEW - Leibniz Centre for European Economic Research.

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    More about this item

    Keywords

    market power; risk-hedging; forward contracts; spot market; over-the-counter trade; market transparency; churn rates;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities

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