Index Contracts and Spot Market Competition

It has long been argued that long-term contracts enhance competition, but the repeated nature of many markets has been neglected. This paper analyzes the impact of long-term contracts on the ability to sustain collusive outcomes. I consider a simple model where firms have signed index contracts and repeatedly interact on the spot market. The contracts specify a quantity and a price indexed to the spot price where the indexation can take different forms. It is shown that these contracts facilitate collusion on the spot market provided that the indexation to the spot price is sufficiently strong