This paper studies the impact of a futures market on a cash market in which there is a dominant producer and a competitive fringe of price-taking firms. It is shown that a futures market has two effects: (i) it increases the production of the fringe producers because it enables them to reduce their risk; and (ii) it also enables the dominant producer to manipulate futures markets sales to induce the fringe firms to produce less. Thus the dominant producer has an incentive to destroy futures markets, but, failing that, his activities nevertheless increase the efficiency of the futures market (reduce its bias), and reduce producer risk. If fringe producers are unreasonably risk averse, and cannot observe the dominant producer's current supply or storage decision, then the dominant producer has a further incentive to destabilize the cash market.
Details
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Author
Newbery, David M.
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Document Date
1982/09/01
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Document Type
Departmental Working Paper
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Report Number
DRD39
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Volume No
1
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Total Volume(s)
1
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Country
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Region
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Disclosure Date
2010/07/01
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Disclosure Status
Disclosed
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Doc Name
The manipulation of futures markets by a dominant producer
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Keywords
development research center;future market;degree of risk aversion;average spot price;cost of transfer;elasticity of supply;long run equilibrium;market power;cash market;supply response;future price;production decision;e cash;
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Citation
Newbery, David M.
The manipulation of futures markets by a dominant producer (English). Development Research Department discussion paper ; no. DRD 39 Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/666861468313815751/The-manipulation-of-futures-markets-by-a-dominant-producer