Center for the Study of Energy Markets

The competitive implications of the ability of firms to trade in transparent forward markets has received considerable attention in the academic literature. These implications have not had much impact on policy however. In this paper I examine the implications of forward contracts on oligopoly environments by extending the model of Allaz and Vila to an environment with multiple firms and increasing marginal cost. I then take estimates of key parameters of this model from existing electricity markets to predict the market impact of one round of public contracting, such as those seen in auctions for retail provision and resource procurement. The results imply that the importance of supplier concentration is magnified when forward contracts are present.