Gilles Chemla (Dauphine, CNRS et Imperial College)

In this work, we analyze vertical integration and forward hedging as two separate levers for demand and spot price risk diversification. We show that they have a similar impact on retail prices and agents’ utility, but also a number of differences due to the asymmetry between upstream and downstream segments. While agents always use the forward market when it is available, vertical integration may not arise in equilibrium. When downstream agents are highly risk averse, vertical integration may be a better way to diversify risk than spot, forward and retail markets.