Forward Contracts, Market Structure, and the Welfare Eﬀects of Mergers
Nathan H. Miller and Joseph U. Podwol, EAG 17-2, October 2017
We examine how forward contracts aﬀect economic outcomes under generalized market structures. In the model, forward contracts discipline the exercise of market power by making proﬁt less sensitive to changes in output. This impact is greatest in markets with intermediate levels of concentration. Mergers reduce the use of forward contracts in equilibrium and, in markets that are suﬃciently concentrated, this ampli-ﬁes the adverse eﬀects on consumer surplus. Additional analyses of merger proﬁtability and collusion are provided. Throughout, we illustrate and extend the theoretical re-sults using Monte Carlo simulations. The results have practical relevance for antitrust enforcement.
Keywords: forward contracts; hedging; mergers; antitrust policy
JEL classification: L13; L41; L44