Forward Contracts vs. R&D in Oligopolistic Competition: Strategic Substitutes vs. Complements

It is well-known that forward trading has a pro-competitive effect in oligopoly.(Allaz and Vila, 1993) This paper extends the model of Allaz and Vila (1993) by considering system (complements) competition. Nash price competition analysis for (perfect) complements also shows that allowing forward trading leads to a substantial expansion in the supply of final goods. Allowing integration relaxing antitrust and promoting cooperative research like RJVs can substantially reduce system price. But, as second best policy, forward trading among complements can also contribute to enhancing market efficiency. Finally, we also consider the possibility of implicit collusion among oligopolistic producers. In contrast with Liski et al.(2006), we derive the more simple conclusion that forward trading plays a role of threatening to punish and promoting collusion in a multiperiod Allaz-Vila game. Our findings are summarized as follows: derivatives have effects on competition. It applies to complements as well as substitutes. In special, development of IT technology calls for more sophisticated analysis of complements considering derivatives.