Forward trading and collusion of firms in volatile markets

Assuming deterministic demand Liski and Montero (2006) show that forward trading is able to facilitate collusion. We present a more concise model incorporating the main reason for forward trading: Uncertainty. In general, fluctuations make collusion harder to sustain (Rotemberg and Saloner, 1986). However, using forward contracts, firms are able to decrease the incentives to deviate from a collusive agreement even in very volatile markets. This makes collusive strategies more sustainable and decreases social welfare.