Interaction between Resource Extraction and Futures Markets: A Game-Theoretic Analysis

  • Louis Phlips
  • Ronald M. Harstad


This paper is an attempt to model three salient features of futures markets for exhaustible resources: oligopolistic control of the market for the basic commodity, the purely speculative nature of most of futures trading and apparent availability of unlimited funds to the traders.

Interaction between the extraction policy of duopolists and their futures trading is modelled with the help of a two-stage noncooperative game with incomplete information. The second stage is a two-period extraction game, which shows how futures positions taken by the producers affect their planned extraction rates and the resulting spot price of the resource. The first stage is a noncooperative futures game in which equilibrium net positions of and subgame perfect contracts between two producers and a representative speculator are determined.

The purely speculative part of futures positions depends mainly on the (known) structure of inconsistent prior beliefs about the level of uncertain market demand for the basic commodity. The hedging part is related to (known) levels of stocks of the resource available to the individual producers, and to their degree of risk aversion. The conditions under which each player goes net short or net long are worked out in detail.


Risk Aversion Future Market Future Contract Spot Price Short Position 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Anderson, R.W., ed. (1984). The Industrial Organization of Futures Markets. Lexington, Mass: D.C. Health and Company.Google Scholar
  2. Anderson, R.W. and C.L. Gilbert (1988). Commodity Agreements and Commodity Markets - Lessons from Tin. The Economic Journal 98: 1 – 15.CrossRefGoogle Scholar
  3. Anderson, R.W. and M. Sundaresan (1984). Futures Markets and Monopoly, In: R.W. Anderson (ed.): The Industrial Organization of Futures Markets. Lexington, Mass.: D.C. Health and Company, pp: 75 – 106.Google Scholar
  4. Aumann, R.J. and M. Maschler (1964). The Bargaining Set for Cooperative Games. In: M. Dresher, L.S. Shapley and A.W. Tucker (eds.): Advances in Game Theory. Annals of Mathem. Studies No 52. Princeton, N.J.: Princeton University Press, pp. 443 – 476.Google Scholar
  5. Brianza, T., L. Phlips and J.-F. Richard (1987). Futures Markets, Speculation and Monopoly“. Revised version of CORE Discussion Paper 8725, Louvain-la-Neuve.Google Scholar
  6. Harsanyi, J.C. and R. Selten (1988). A General Theory of Equilibrium Selection in Games. Cambridge, Mass.: MIT Press.Google Scholar
  7. House of Commons (1986). The Tin Crisis. Second Report from the Trade and Industry Committee, Session 1985 – 86. London: HMSO.Google Scholar
  8. Kreps, D.M. (1977). A Note on ‘Fulfilled Expectations’ Equilibria. J. Econom. Theory 14: 32 – 43.CrossRefGoogle Scholar
  9. Milgrom, P.R. and N.L. Stokey (1982). Information, Trade and Common Knowledge. J. Econom. Theory 26: 17 – 27.CrossRefGoogle Scholar
  10. Novshek, W. (1985). On the Existence of Cournot Equilibrium. Rev. Econom. Studies 52: 85 – 98.CrossRefGoogle Scholar
  11. Reinganum, J.F. and N.L. Stokey (1985). Oligopoly Extraction of a Common Property Natural Resource: the Importance of the Period of Commitment in Dynamic Games. Intern. Econom. Rev. 26: 161 – 173.CrossRefGoogle Scholar
  12. Selten, R. (1982). Einführung in die Theorie der Spiele mit unvollständiger Information. Information in der Wirtschaft, Schriften des Vereins für Socialpolitik, Gesellschaft für Wirtschafts-und Sozialwissenschaften, N.F. Bd. 126: 81 – 147, Berlin: Duncker & Humblot.Google Scholar
  13. Tirole, J. (1982). On the Possibility of Speculation Under Rational Expectations. Econometrica 24: 74 – 81.Google Scholar
  14. van Damne, E.E.C. (1987). Stability and Perfection of Nash Equilibria. Berlin: Springer-Verlag.Google Scholar
  15. Varian, H.R. (1989). Differences in Opinion in Financial Markets. In: C. Stone (ed.): Financial Risk: Theory, Evidence and Implications. Amsterdam: Kluwer Academic Publishers.Google Scholar

Copyright information

© Springer-Verlag Berlin Heidelberg 1991

Authors and Affiliations

  • Louis Phlips
  • Ronald M. Harstad

There are no affiliations available

Personalised recommendations