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(Monopolistic) resource extraction and limit pricing: The market penetration of competitively produced synfuels

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  • Franz Wirl

Abstract

This paper analyzes the market penetration of a competitively produced synfuel, e.g., solar energy, in a market that is initially dominated by a resource extracting monopoly. The availability of the renewable substitute depends not only on the price/cost ratio but also on the installed capacities, which reflect historical investments. As a consequence, the resource monopoly faces a discontinuous residual demand schedule. The dynamic interactions between the resource cartel and the synfuel industry are modelled as a differential game; the (open loop) Nash equilibrium is applied to this game. It will be shown that the commodity price will exceed the production costs of the backstop and that the transition from the periods of resource dependence to the backstop technology will be gradual. Copyright Kluwer Academic Publishers 1991

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File URL: http://hdl.handle.net/10.1007/BF00310016
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Bibliographic Info

Article provided by European Association of Environmental and Resource Economists in its journal Environmental & Resource Economics.

Volume (Year): 1 (1991)
Issue (Month): 2 (June)
Pages: 157-178

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Handle: RePEc:kap:enreec:v:1:y:1991:i:2:p:157-178

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Web page: http://www.springerlink.com/link.asp?id=100263

Related research

Keywords: Resource depletion; synfuel; differential game;

References

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  1. Heal, G., 1990. "The Optimal Use Of Exhaustible Resources," Papers fb-_90-10, Columbia - Graduate School of Business.
  2. Stephen W. Salant, 1977. "Staving off the backstop: dynamic limit-pricing with a kinked demand curve," International Finance Discussion Papers 110, Board of Governors of the Federal Reserve System (U.S.).
  3. Salant, Stephen W, 1976. "Exhaustible Resources and Industrial Structure: A Nash-Cournot Approach to the World Oil Market," Journal of Political Economy, University of Chicago Press, vol. 84(5), pages 1079-93, October.
  4. Cremer, Jacques & Weitzman, Martin L., 1976. "OPEC and the monopoly price of world oil," European Economic Review, Elsevier, vol. 8(2), pages 155-164, August.
  5. Hoel, Michael, 1983. "Monopoly resource extractions under the presence of predetermined substitute production," Journal of Economic Theory, Elsevier, vol. 30(1), pages 201-212, June.
  6. Solow, Robert M, 1974. "The Economics of Resources or the Resources of Economics," American Economic Review, American Economic Association, vol. 64(2), pages 1-14, May.
  7. Dasgupta,P. S. & Heal,G. M., 1985. "Economic Theory and Exhaustible Resources," Cambridge Books, Cambridge University Press, number 9780521297615.
  8. Wirl, Franz, 1988. "Resource extraction of imperfect substitutes," Energy Economics, Elsevier, vol. 10(3), pages 242-248, July.
  9. Stiglitz, Joseph E & Dasgupta, Partha, 1981. " Market Structure and Resource Extraction under Uncertainty," Scandinavian Journal of Economics, Wiley Blackwell, vol. 83(2), pages 318-33.
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Cited by:
  1. Wirl, Franz, 2008. "Resource extraction by cartels facing constraints on cooperation," Resource and Energy Economics, Elsevier, vol. 30(3), pages 409-427, August.
  2. Jouvet, Pierre-André & Schumacher, Ingmar, 2012. "Learning-by-doing and the costs of a backstop for energy transition and sustainability," Ecological Economics, Elsevier, vol. 73(C), pages 122-132.
  3. Franz Wirl & Cees Withagen, 2000. "Complexities due to sluggish expansion of backstop technologies," Journal of Economics, Springer, vol. 72(2), pages 153-174, June.
  4. Niko Jaakkola, 2013. "Green Technologies and the Protracted End to the Age of Oil: A strategic analysis," OxCarre Working Papers 099, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.

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