Figure 1: First period strategic demand and supply in a closed economy
derived from these inter-temporal arbitrage activities. As the figure shows, the strategic
demand rotates around the (non-strategic) demand D at the second period equilibrium price
in the market track which, according to Lemma 1, is equal to Pe. Similarly, the strategic
supply rotates around the (non-strategic) supply S at Pe. To understand how S0 and D0 are
derived, let us consider the buyers’ decision (the problem faced by the producers is similar),
starting with the case in which a buyer’s marginal willingness to pay (MV) is higher than
P e . From Lemma 1, we know that he will always consume in the second period. If he enters
a transaction in the first period, his total payoff for the two periods will be
(1 + δ)(MV - P).
given that he is locked into the first period price P . If he does not enter a transaction in
the first period, he will be able to trade in the market track at the price Pe in the second
period. Thus his total payoff will be
δ(MV - Pe).
The buyer is indifferent about whether or not to carry out a transaction in the first period
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