1992 Reports

Speculation on Primary Commodities: The Effects of Restricted Entry

McLaren, John

There are doubts about the competitiveness of real-world commodity trade and storage. Thus, we present a model of oligopolistic commodity speculation, in which a limited number of speculators practice non-cooperative storage in an infinite horizon game. A significant technical difficulty due to the non-negative stock constraint is overcome, and a tractable sub-game perfect equilibrium is presented, in which it is shown that less is stored and prices are more volatile than under perfect competition. It turns out that a tax on consumption of the good would increase storage, stabilize prices, increase welfare and raise speculative profits; the oligopolists would thus lobby for a tariff raised against their own shipments.