Strategic futures trading in oligopoly∗ Jhinyoung SHIN †

This paper investigates the incentives for firms to engage in futures trading in the context of an oligopolistic product market and strategic trading in a futures market. If the producing firms are risk neutral and have perfect information about product market conditions, they can use futures trading strategically to improve their posi-tions in the product market competition or/and to gain trading profits from their private information. It is demonstrated that if the futures positions taken by the pro-ducing firms are observable as they make their product market decisions, their moti-vation of adopting futures trading as a credible commitment device for the product market competition outweighs the incentive to earn trading profits from information-based trading, and they producing firms expect to lose money from futures trading. However, if the futures transactions of the producing firms are not observable, the effectiveness of futures trading as a commitment device in the product market com-petition disappears, and they trade in the futures market just to earn trading profits. A couple of policy implication on the welfare effect on consumers and producers, and the stability of futures market are drawn from the model