Multiple Openings and Competitiveness of Forward Markets: Experimental Evidence.

Area of Science:

• Behavioral economics
• Market design
• Industrial organization

Background:

• Forward markets can influence market competition by altering strategic interactions between firms.
• Existing theory suggests forward markets may enhance competition, but empirical evidence from experimental settings is limited.

Purpose of the Study:

• To experimentally investigate the competition-enhancing effects of forward markets in Cournot duopoly and quadropoly settings.
• To compare experimental outcomes with theoretical predictions for quantity-setting firms.
• To examine the impact of endogenous market closure rules on competition.

Main Methods:

• Conducting controlled laboratory experiments with participants acting as firms in Cournot duopoly and quadropoly markets.
• Implementing multiple forward trading periods with varying structures, including fixed and endogenously determined periods.
• Analyzing participants' quantity setting decisions and market outcomes.

Main Results:

• Markets with two forward periods exhibited competitive outcomes, closely aligning with theoretical predictions.
• The hypothesis that forward markets enhance competition was strongly supported by the experimental data.
• An endogenous market closure rule, where markets close upon agreement to sell zero, also resulted in highly competitive outcomes.
• These findings were consistent across both duopoly and quadropoly market structures.

Conclusions:

• Forward markets demonstrably enhance competition in experimental Cournot settings.
• The structure of forward markets, whether fixed or endogenously determined, significantly influences competitive outcomes.
• Experimental results validate theoretical predictions and highlight the practical implications of forward market design for promoting competition.