EXTRACTING RENTS WITH FORWARD CONTRACTS

We consider a risk neutral final goods producer, operating with a concave production function. We show that when faced with the possibility of quantity rationing in the spot market for an input the producer will always pay a premium to purchase some units of that input in a forward market. A monopolistic supplier of the input can therefore earn additional rents by offering to sell units in both a forward market and a spot market, effectively price discriminating along a producer's demand curve for the input. We thus provide a model of forward contracting in which prices are set sequentially, there is no risk aversion, and customers purchase positive quantities in both the forward and the spot market.