Strategic Corporate Hedging

We consider a dynamic multi-period framework of a Cournot duopoly and introduce a simultaneous hedging and a storage opportunity to allow players to manage risk before and after demand uncertainty is realized. Decision makers face a strategic dilemma: they must weigh the advantages of dealing with their risk exposure and the disadvantages of higher competition. Due to the storage opportunity, our multi-period setting differs from a repetition of the single-shot interaction. In equilibrium, firms consider the strategic impact of the hedging component, which increases competition. We provide supportive evidence of this theory in a laboratory experiment. Our experimental results suggest that the simultaneous hedging device significantly increases competition and negates duopoly profits.