Exclusion through speculation

•Financial derivatives are often cash-settled and traded through an intermediary.•An incumbent can use those contracts to partially exclude entry.•It does so by selling a large amount of derivatives to a large buyer.•This scheme leads to inefficient entry and extra risk for the buyer.•Exclusion is still possible if contracts are anonymously offered.

We demonstrate how an incumbent producer of commodities can use cash-settled derivatives contracts to deter entry and extract rents from a potential competitor. By selling more derivatives than total demand, the producer commits to low prices and forces the entrant to price low upon entry. By setting a high upfront derivatives price, the producer can extract the consumer's gains from those low prices. This exclusionary scheme becomes more difficult when the buyer becomes more risk averse and with multiple buyers.