PRICE DESTABILIZING SPECULATION: THE ROLE OF STRATEGIC LIMIT ORDERS
We show that under Cournot competition with only a few strategic producers, a speculator with a deep pocket and access to sufficient storage facility can have a destabilizing effect on commodity prices. The speculator, through clever use of limit orders, is able to prot by buying low and selling high, and behaving like a pseudo-Stackelberg leader. This creates price volatility even though there is no fundamental uncertainty in the economy and all market participants act rationally. In the model economy, consumers can be strictly worse off when the speculator has access to free disposal of excess inventory. Our analysis shows that profitable destabilizing speculation, while feasible, may be difficult to sustain.
Ravi Jagannathan, Suman Banerjee, Kei Wang
Jagannathan, Ravi, Suman Banerjee, and Kei Wang. 2023. PRICE DESTABILIZING SPECULATION: THE ROLE OF STRATEGIC LIMIT ORDERS.READ