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Forward Trading and Collusion in Oligopoly

Matti Liski and Juan-Pablo Montero

Journal of Economic Theory 131 (2006) 212-230

Matti Liski and Juan-Pablo Montero, Journal of Economic Theory 131 (2006) 212-230

We consider an infinitely repeated oligopoly in which at each period firms not only serve the spot market by either competing in prices or quantities but also have the opportunity to trade previous termforwardnext term contracts. Contrary to the pro-competitive results of finite-horizon models, we find that the possibility of previous termforward tradingnext term allows firms to sustain collusive profits that otherwise would not be possible to achieve. The result holds both for price and quantity competition and follows because (collusive) contracting of future sales is more effective in deterring deviations from the collusive plan than inducing the previously identified pro-competitive effects.

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