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PRICE CONSTRAINTS, FORWARD MARKETS AND THE COMPETITIVE FIRM UNDER PRICE UNCERTAINTY *
Author(s) -
Wang Leonard F. S.
Publication year - 1983
Publication title -
bulletin of economic research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.227
H-Index - 29
eISSN - 1467-8586
pISSN - 0307-3378
DOI - 10.1111/j.1467-8586.1983.tb00445.x
Subject(s) - economics , microeconomics , risk aversion (psychology) , price risk , forward price , limit price , production (economics) , market price , set (abstract data type) , forward contract , price setting , factor price , mid price , econometrics , financial economics , price level , expected utility hypothesis , monetary economics , computer science , futures contract , programming language
This article proposes a model of the competitive firm simultaneously facing price constraints and forward markets under price uncertainty. The incorporation of a forward market is shown to be very important because a risk‐averse firm will set its production decision to the forward price regardless of its attitude toward risk. In addition, we show that risk aversion is a sufficient condition for a decrease in risk to reduce the amount hedged when risk is reduced through a mean‐preserving price squeeze.