A Communication Proof Equilibrium Concept

This paper proposes an equilibrium concept for the classes of environments in which players can communicate with each other but cannot make binding agreements. The communication-proof equilibrium is intended to be regarded as an extension of both coalition- and renegotiation-proof equilibria. Conceptual foundations for this particular definition are discussed as it is confronted with other definitions in these environments.Publicad

The role of observability in futures markets

Allaz (1992) and Allaz and Vila (1993) show that in an oligopolistic industry the introduction of a futures market that operates prior to the spot market induces more competitive outcomes. Hughes and Kao (1997) show that this result presumes that firms’ future positions are perfectly observed, and that when firms’ positions are not observed the Cournot outcome arises. We study an alternative formulation of observability, where the behavior of participants in the futures market is explicitly analyzed, and show that this approach leads to different results. Imperfect observability induces more competitive outcomes than Allaz and Vila’s model.Publicad

The role of observability in futures markets

Allaz and Vila (1993) show that oligopolistic industries may become more competitive if a futures market is added previous to the spot market. Later, Hughes and Kao (1997) show that this result occurs only if positions in the futures market are observed, and that without this condition the result is again the Cournot equilibrium. In this work we study different explicit formulations of observability and argue that the lack of it may induce a result very different from the one anticipated in Hughes and Kao (1997). By comparing the game forms of the different models, one can discuss about the suitability of either of them. In particular, the one we find most reasonable fit better some of the stylized facts of an industry like the power market in the U.K

Strategic interaction between futures and spot markets.

There is a literature (e.g., Allaz and Vila, 1992 and Hughes and Kao, 1997) showing that in an oligopolistic context, the presence of a futures market induces firms to use it in order to increase its market share. The consequence of this behavior is that the total quantity supplied by the industry increases, thus making the oligopolistic outcome closer to the competitive equilibrium. In the present work, we propose a model to study the interaction of spot and futures markets that does not imply this pro-competitive effect. The model is the same as in Allaz and Vila in the sense that firms have infinitely many moments to trade in the futures market before the spot market takes place. We analyze the equilibria in the infinite case directly and show that many equilibria emerge in a kind of folk-theorem result (but ours is not a repeated game). The equilibrium in which firms do not use the forward market is particularly robust as it satisfies the most demanding definition of renegotiation-proofuess. Furthermore, if firms are allowed to buy in the futures market, they can sustain the monopolistic outcome in a renegotiation-proof equilibrium (notice that there is only one period in the spot market). We also study the role of information in the model and argue that our results fit better stylized facts of some industries like the power market in the U.K.Futures markets; Cournot competition; Collusion;

Bagwell's paradox, forward induction and outside option games

In Stackelberg-like games there is an advantage of moving first. However, Bagwell (1995) shows that this result may not hold if the second player can make only imperfect observations. We explore whether this paradox also holds when the advantage comes from forward induction arguments in the class of outside option games.Bagwell's paradox, Commitment, Observability, Noise, Outside option games, Forward induction