Forward trading in exhaustible-resource oligopoly

• We show that contracting enhances competition in resource markets.
• The result sheds light on if contract trading in commodity markets should be regulated.
• “Speculating” with contract transactions leads to lower prices.
• The degree of competition will depend on the resource endowment.
• Applies to electricity, pollution permit, and resource commodity markets.

We analyze oligopolistic exhaustible-resource depletion when firms can trade forward contracts on deliveries – a market structure relevant for some resource markets (e.g., storable pollution permits, hydro-based power pools) – and find that trading forwards can have substantial implications for resource depletion. We show that when firms’ initial resource-stocks are the same, the subgame-perfect equilibrium path approaches the perfectly competitive path as firms trade forwards frequently. But when the initial stocks differ, firms can credibly escape part of the competitive pressure of forward contracting. It is a unique feature of the resource model that equilibrium contracting and the degree of competition depends on resource endowments.