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Estimation of Market Power in a Nonrenewable Resource Industry

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  • Gregory M. Ellis
  • Robert Halvorsen
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    Abstract

    In nonrenewable resource industries, the existence of a markup of price over marginal market cost may reflect the existence of an implicit user cost for the resource rather than market power. We show that valid estimates of market power can be obtained by the joint estimation of a restricted cost function and an inverse supply relation. Estimation of the model with data for the largest firm in the international nickel industry indicates that output price substantially exceeded marginal market cost, with most of the difference due to the exercise of market power rather than the user cost of the resource.

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    Bibliographic Info

    Article provided by University of Chicago Press in its journal Journal of Political Economy.

    Volume (Year): 110 (2002)
    Issue (Month): 4 (August)
    Pages: 883-899

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    Handle: RePEc:ucp:jpolec:v:110:y:2002:i:4:p:883-899

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    1. Stollery, Kenneth R., 1983. "Mineral depletion with cost as the extraction limit: A model applied to the behavior of prices in the nickel industry," Journal of Environmental Economics and Management, Elsevier, vol. 10(2), pages 151-165, June.
    2. Jeffrey A. Krautkraemer, 1998. "Nonrenewable Resource Scarcity," Journal of Economic Literature, American Economic Association, vol. 36(4), pages 2065-2107, December.
    3. Harold Hotelling, 1931. "The Economics of Exhaustible Resources," Journal of Political Economy, University of Chicago Press, vol. 39, pages 137.
    4. Robert D. Cairns, 1981. "An Application of Depletion Theory to a Base Metal: Canadian Nickel," Canadian Journal of Economics, Canadian Economics Association, vol. 14(4), pages 635-48, November.
    5. Pindyck, Robert S., 1987. "On monopoly power in extractive resource markets," Journal of Environmental Economics and Management, Elsevier, vol. 14(2), pages 128-142, June.
    6. Pindyck, Robert S, 1985. "The Measurement of Monopoly Power in Dynamic Markets," Journal of Law and Economics, University of Chicago Press, vol. 28(1), pages 193-222, April.
    7. Halvorsen, Robert & Smith, Tim R, 1986. "Substitution Possibilities for Unpriced Natural Resources: Restricted Cost Functions for the Canadian Metal Mining Industry," The Review of Economics and Statistics, MIT Press, vol. 68(3), pages 398-405, August.
    8. Denise Young, 1992. "Cost Specification and Firm Behaviour in a Hotelling Model of Resource Extraction," Canadian Journal of Economics, Canadian Economics Association, vol. 25(1), pages 41-59, February.
    9. Farrow, Scott, 1985. "Testing the Efficiency of Extraction from a Stock Resource," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 452-87, June.
    10. Cairns, Robert D., 1986. "More on depletion in the nickel industry," Journal of Environmental Economics and Management, Elsevier, vol. 13(1), pages 93-98, March.
    11. Halvorsen, Robert & Smith, Tim R, 1984. "On Measuring Natural Resource Scarcity," Journal of Political Economy, University of Chicago Press, vol. 92(5), pages 954-64, October.
    12. Appelbaum, Elie, 1979. "Testing price taking behavior," Journal of Econometrics, Elsevier, vol. 9(3), pages 283-294, February.
    13. Cairns, Robert D., 1985. "Nickel depletion and pricing: Further considerations," Journal of Environmental Economics and Management, Elsevier, vol. 12(4), pages 395-396, December.
    14. David Levhari & Nissan Liviatan, 1977. "Notes on Hotelling's Economics of Exhaustible Resources," Canadian Journal of Economics, Canadian Economics Association, vol. 10(2), pages 177-92, May.
    15. Stollery, Kenneth R., 1985. "User costs versus markups as determinants of prices in the nickel industry: reply," Journal of Environmental Economics and Management, Elsevier, vol. 12(4), pages 397-400, December.
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    Cited by:
    1. Lee, Myunghun, 2008. "Environmental regulations and market power: The case of the Korean manufacturing industries," Ecological Economics, Elsevier, vol. 68(1-2), pages 205-209, December.
    2. Margaret E. Slade & Henry Thille, 2009. "Whither Hotelling: Tests of the Theory of Exhaustible Resources," Annual Review of Resource Economics, Annual Reviews, vol. 1(1), pages 239-259, 09.
    3. John Livernois & Henry Thille & Xianqiang Zhang, 2006. "A test of the Hotelling rule using old-growth timber data," Canadian Journal of Economics, Canadian Economics Association, vol. 39(1), pages 163-186, February.
    4. Hart, Rob & Spiro, Daniel, 2011. "The elephant in Hotelling's room," Energy Policy, Elsevier, vol. 39(12), pages 7834-7838.
    5. Slade, Margaret E., 2004. "Competing models of firm profitability," International Journal of Industrial Organization, Elsevier, vol. 22(3), pages 289-308, March.
    6. Lee, Myunghun, 2008. "Environmental regulation and production structure for the Korean iron and steel industry," Resource and Energy Economics, Elsevier, vol. 30(1), pages 1-11, January.
    7. Lee, Myunghun, 2013. "The effects of an increase in power rate on energy demand and output price in Korean manufacturing sectors," Energy Policy, Elsevier, vol. 63(C), pages 1217-1223.
    8. Lee, Myunghun, 2011. "Measurement of market power for the environmentally regulated Korean iron and steel manufacturing industry," Resources Policy, Elsevier, vol. 36(3), pages 249-254, September.

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