Relaxing competition through speculation: Committing to a negative supply slope

The trade in commodity derivatives is widespread and trading volumes often surpass that of the underlying commodities. Commodity derivatives markets have seen a 60fold increase in the value of trade between 1998 and 2008. In 2008 the outstanding value of commodity derivatives equaled $13 trillion. This is twice the worldwide output of commodities, and about 21% of world GDP. Ideally derivatives markets improve market efficiency as they allow firms to manage risk and facilitate price discovery by aggregating information across market participants. However, in this paper we show that allowing for derivatives trade increases spot market volatility and harms competition, when dominant producers trade futures and options contracts and make price-contingent supply offers in the spot market. In theory, this would be the case in for instance deregulated wholesale electricity markets.