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RESEARCH PRODUCT

Forward Trading and Entry under Incomplete Information

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This paper examines the strategic use of forward trading by an incumbent producer who faces potential entry under incomplete information. We show the existence of Bayesian-Nash equilibria in which the incumbent uses forward transactions to deter entry that would have occurred under complete information. Additionally, we find that increasing the frequency of forward trading can raise the volume of pre-entry forward trading and affect the likelihood of entry. Our analysis shows that the incumbent can deter entry with a short position if production cost correlation is low and with a long position if that correlation is high. In the limiting case of continuous trading, these two configurations collapse into one with a pre-entry short position regardless of cost correlation.