Working Paper: NBER ID: w30828
Authors: Suman Banerjee; Ravi Jagannathan; Kai Wang
Abstract: Using a two-period model of a commodity market with a large number of atomistic consumers and two strategic sellers, we show that a speculator with access to storage can lower the market price while buying and raise the price while selling by clever use of limit, stop-loss, and market orders. The speculator profits from it. This creates price volatility even though there is no demand or supply uncertainty, and all market participants act rationally. Prices are more volatile when the speculator has access to free disposal. Such speculative activity makes the strategic sellers worse off and consumers better off. Our results are robust to introducing demand uncertainty, having more than one large speculator, and more than two strategic sellers. When there are multiple strategic sellers consumers can be worse off.
Keywords: No keywords provided
JEL Codes: G01; G10; G12; G18; G19
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Entry of a speculator with access to storage (D84) | Prices become volatile (G13) |
| Speculator lowers market-clearing price when buying in period 1 (D41) | Prices decrease in period 1 (E31) |
| Speculator raises market-clearing price when selling in period 2 (G19) | Prices increase in period 2 (E30) |
| Speculator's actions (D84) | Strategic sellers are worse off (D43) |
| Demand uncertainty or multiple strategic sellers (D80) | Consumers' welfare is negatively affected (D62) |