Two-Period Duopolies with Forward Markets

We experimentally consider a dynamic multi-period framework of a Cournot duopoly with a simultaneous option to engage in financial risk management and a real option to delay supply. The option to engage in financial risk management allows players to manage risk before uncertainty is realized, while the real option allows them to manage risk after uncertainty is realized. Due to the real option, our multi-period setting is not a mere repetition of a single-shot interaction. In such a setting, firms face a strategic dilemma: they must weigh the advantages of dealing with their risk exposure against the disadvantages of higher competition. In theory, firms make strategic use of the hedging component, which enhances market competition. Our experimental results provide supportive evidence of this theory by suggesting that the hedging device significantly increases competition and negates duopoly profits even in a simultaneous setting.