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A capacitated commodity trading model with market power

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  • Martínez de Albeniz, Victor

    (IESE Business School)

  • Vendrell, Josep M.

    (IESE Business School)

Abstract

In this paper we consider the problem of a trader who purchases a commodity in one market and resells it in another. The trader is capacitated: the trading volume is limited by operational constraints, e.g., logistics. The two markets quote different prices, but the spread is reduced when trading takes place. We are interested in finding the optimal trading policy across the markets so as to obtain the maximum profit in the long-term, taking into account that the trading activity influences the price processes, i.e., market power. As in the no-market-power case, we find that the optimal policy is determined by three regions, where 1) move as much as possible from one market to the other; 2) the same in the opposite direction; or 3) do nothing. Finally, we use the model to analyze kerosene price differences between New York and Los Angeles.

Suggested Citation

  • Martínez de Albeniz, Victor & Vendrell, Josep M., 2008. "A capacitated commodity trading model with market power," IESE Research Papers D/728, IESE Business School.
    • Handle: RePEc:ebg:iesewp:d-0728
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    File URL: http://www.iese.edu/research/pdfs/DI-0728-E.pdf
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    References listed on IDEAS

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    1. repec:dau:papers:123456789/11439 is not listed on IDEAS
    2. Corinne Chaton & Laure Durand‐Viel, 2013. "Real Asset Valuation under Imperfect Competition: Can We Forget About Market Fundamentals?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 22(1), pages 125-139, March.

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    Keywords

    commodity trading; price processes; inventory management;
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