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Strategic Resource Extraction And Substitute Development

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  • Michielsen, T.O.

    (Tilburg University, Center for Economic Research)

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    Abstract

    Abstract We analyze a dynamic game between a buyer and a seller of an exhaustible resource. The seller chooses resource supply; the buyer can pay a fixed cost to invent a perfect substitute for the resource at any time. In closed-loop equilibrium, the buyer adopts the substitute when the resource is exhausted. Investing makes the buyer worse off because it decreases resource supply, destroys his ability to derive surplus from the resource through delaying the investment cost incurrence, and causes a larger share of the resource stock to be sold at his reservation price. From the seller’s perspective, the buyer’s ability to develop a substitute is equivalent to an already available substitute with a higher marginal cost.

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    Bibliographic Info

    Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2013-014.

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    Date of creation: 2013
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    Handle: RePEc:dgr:kubcen:2013014

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    Web page: http://center.uvt.nl

    Related research

    Keywords: exhaustible resource; substitute; innovation; closed-loop equilibrium;

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    1. Karp, Larry & Newbery, David M., 1993. "Intertemporal consistency issues in depletable resources," Handbook of Natural Resource and Energy Economics, in: A. V. Kneese† & J. L. Sweeney (ed.), Handbook of Natural Resource and Energy Economics, edition 1, volume 3, chapter 19, pages 881-931 Elsevier.
    2. Gerlagh, Reyer & Liski, Matti, 2011. "Strategic resource dependence," Journal of Economic Theory, Elsevier, vol. 146(2), pages 699-727, March.
    3. Dasgupta, Partha & Gilbert, Richard & Stiglitz, Joseph, 1983. "Strategic Considerations in Invention and Innovation: The Case of Natural Resources," Econometrica, Econometric Society, vol. 51(5), pages 1439-48, September.
    4. Hoel, Michael, 1983. "Future conditions and present extraction : A useful method in natural resource economics," Resources and Energy, Elsevier, vol. 5(4), pages 303-311, December.
    5. Nancy Gallini & Tracy Lewis & Roger Ware, 1983. "Strategic Timing and Pricing of a Substitute in a Cartelized Resource Market," Canadian Journal of Economics, Canadian Economics Association, vol. 16(3), pages 429-46, August.
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