Equilibrium Forward Contracts on Nonstorable Commodities in the Presence of Market Power

We consider an equilibrium forward contract on a nonstorable commodity when forward market participants have market powers. The forward contract is negotiated through a Nash bargaining process due to market powers. We derive the unique equilibrium forward contract in closed form and provide an extensive comparative statics analysis. We show in particular that the introduction of a forward market may increase both the production of the commodity and the trading volume in the spot market. We then calibrate our model to an electricity data set and conduct a numerical analysis. We find that in contrast to the forward price on a storable commodity, the forward price on a nonstorable can be nonmonotonic in the spot price. We show that the forward price can be a downward or an upward biased predictor of the spot price, depending on the convenience yield level and the market power. In addition, both the forward price volatility and the open interest volatility decrease with the time to maturity. Furthermore, for commodities with low (high) convenience yield, the open interest is greater for a shorter (longer) maturity forward. Journal of Economic Literature Classification Numbers: D11, D91, G11, C61.