On the Coexistence of Spot and Contract Markets: a Delivery Requirement Explanation

A model is presented in which spot and contract market exchange co-exist. A contract consists of a delivery requirement between an upstream and a downstream party. Contract formation determines to a certain extent the probability distribution of the spot market price. This contract formation externality entails the removal of high reservation price buyers and various sellers from the spot market. The first effect decreases the expected spot market price when the number of contracts is small, whereas the decrease in the number of sellers and additional residual contract demand increase the expected spot market price beyond a certain number of contracts. It implies an endogenous upper bound on the number of contracts. Contract prices are positively related to the number of contracts. Finally, additional contracts reduce the variance of the spot market price when the number of contracts is sufficiently large.


Subject(s):
Issue Date:
2006
Publication Type:
Conference Paper/ Presentation
Record Identifier:
http://ageconsearch.umn.edu/record/21041
PURL Identifier:
http://purl.umn.edu/21041
Total Pages:
27
JEL Codes:
D40; L10
Series Statement:
Selected Paper




 Record created 2017-04-01, last modified 2018-01-22

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