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.

Many commodities (including energy, agricultural products and metals) are sold both on spot markets and through long-term contracts which commit the parties to exchange the commodity in each of a number of spot market trading periods. This paper shows how the length of forward contracts affects the possibility of collusion in a repeated pricesetting game. We find that as the duration of contracts increases, collusion becomes harder to sustain. Nevertheless, firms with low discount factors that would not be able to sustain collusion without contracts, can always sustain some collusive prices above marginal cost, provided that they sell enough contracts. Hence long-term contracts have an ambiguous impact on collusion. Such ambiguity is due to the interaction of two effects, the gain-cutting effect, which reduces the immediate gain from defection, and the protection effect, which reduces the amount of punishment that deviators can receive.