Forward contracts and competition

Zusammenfassung

Abstract. This paper examines the strategic use of forward contracts in an industry where downstream firms must buy an essential input from imperfectly competitive upstream suppliers. When a single large firm and a fringe of firms exist downstream, the large firm buys forward contracts from the fringe, i.e. there is horizontal subcontracting from the large firm to the firms on the fringe, in order to make the spot market less competitive. Hence our paper argues that horizontal subcontracting becomes an anti-competitive device. We also compare the strategies of buying forward contracts and purchasing productive capacity and we find that both are equivalent tools. When the downstream industry has instead several large firms, they have a "horizontal" incentive to sell forward contracts in order to gain market share, but the former "vertical" incentive to buy them persists. In this case, forward contracting may then lead to less competition in the spot market.