DP1193 | Cartels, Contracts and Centralization: The Transition to Futures Trading for Primary Commodities

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Publication Date

30/06/1995

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Abstract

Trading in futures markets has grown substantially for many commodities. At the same time the power of many dominant producers has weakened and core prices have tended to fall towards those on the fringe. Existing cartel/fringe models fail to explain the difference between core and fringe prices and have no role for the development of futures trading. We present a cartel/fringe model that incorporates search and contracting. The model predicts that cartel prices exceed those on the fringe; that the cartel/fringe price differential narrows as futures trading increases; and that a move to contracting lowers market prices.