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Imperfect competition in the international energy market: a computerized Nash-Cournot model

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  • Salant, Stephen W.

Abstract

This paper describes the conceptual structure, properties, and solution approach of a computerized model of the international energy market. The model treats energy producers as players in a multistage, noncooperative game. The goal of each player (or cartel of players) is assumed to be maximization of discounted profit subject to technical, political, and resource constraints. The model calculates that collection of intertemporal extraction and price paths from which a player can unilaterally deviate only at a loss---the open-loop, Nash equilibrium. The model integrates the theory of exhaustible resources due to Hotelling and the theory of oligopoly due to Nash and Cournot. Although useful as a teaching device to illustrate theoretical results, its main function is to facilitate analysis of real-world resource problems. The model is flexible, allowing the user to specify not only cost, demand and reserve information but also assumptions about who belongs to what coalition. Two shortcomings deserve note. The strategies of players are restricted to time-dated (open-loop) paths. Also, lags cannot be accommodated in the current version. The restriction of the strategy space significantly increases tractability and will permit the incorporation of lags and other complications in the future. The model was built under government contract and is in the public domain.

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File URL: http://mpra.ub.uni-muenchen.de/12021/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 12021.

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Date of creation: Mar 1982
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Publication status: Published in Operations Research 2.30(1982): pp. 252-280
Handle: RePEc:pra:mprapa:12021

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Related research

Keywords: world oil model; open-loop; oligopoly model; Hotelling; exhaustible resources;

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References

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  1. 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.
  2. Lewis, Tracy R. & Schmalensee, Richard., 1979. "On oligopolistic markets for nonrenewable natural resources," Working papers 1052-79., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  3. Loury, Glenn C, 1986. "A Theory of 'Oil'igopoly: Cournot Equilibrium in Exhaustible Resource Markets with Fixed Supplies," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(2), pages 285-301, June.
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Cited by:
  1. 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.
  2. Ngo Long, 2011. "Dynamic Games in the Economics of Natural Resources: A Survey," Dynamic Games and Applications, Springer, vol. 1(1), pages 115-148, March.
  3. Pal, Debashis & Sarkar, Jyotirmoy, 2002. "Spatial competition among multi-store firms," International Journal of Industrial Organization, Elsevier, vol. 20(2), pages 163-190, February.
  4. Paulus, Moritz & Trueby, Johannes & Growitsch, Christian, 2011. "Nations as Strategic Players in Global Commodity Markets: Evidence from World Coal Trade," EWI Working Papers 2011-4, Energiewirtschaftliches Institut an der Universitaet zu Koeln.
  5. Daniel Huppmann, 2013. "Endogenous Shifts in OPEC Market Power: A Stackelberg Oligopoly with Fringe," Discussion Papers of DIW Berlin 1313, DIW Berlin, German Institute for Economic Research.
  6. Paulus, Moritz, 2012. "How are investment decisions in the steam coal market affected by demand uncertainty and buyer-side market power?," EWI Working Papers 2012-3, Energiewirtschaftliches Institut an der Universitaet zu Koeln.
  7. Gérard Gaudet, 2007. "Natural resource economics under the rule of Hotelling," Canadian Journal of Economics, Canadian Economics Association, vol. 40(4), pages 1033-1059, November.
  8. Wirl, Franz, 2008. "Why do oil prices jump (or fall)?," Energy Policy, Elsevier, vol. 36(3), pages 1029-1043, March.

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