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Monopoly, unilateral climate policies and limit pricing

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  • van der Meijden, Gerard
  • Withagen, Cees

Abstract

We examine the behavior of a fossil fuel monopolist who faces demand from two regions: a ‘climate club’ and the ‘rest of the world’ (ROW). Each region is able to produce a perfect substitute for fossil energy at constant marginal costs. The climate club uses a carbon tax and a renewables subsidy as policy instruments. The ROW is policy-inactive. We fully characterize the market equilibrium and show that, due to differences in climate policies between the climate club and the ROW, the monopolistic fossil fuel supplier may choose for two limit-pricing phases to postpone entry of renewables producers: First in the climate club and later in the ROW. As soon as energy demand from the climate club shifts from fossil fuels to renewables, the monopolist abruptly increases the fossil price for the ROW.

Suggested Citation

  • van der Meijden, Gerard & Withagen, Cees, 2020. "Monopoly, unilateral climate policies and limit pricing," Journal of Economic Dynamics and Control, Elsevier, vol. 120(C).
    • Handle: RePEc:eee:dyncon:v:120:y:2020:i:c:s0165188920301639
    DOI: 10.1016/j.jedc.2020.103995
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    References listed on IDEAS

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    More about this item

    Keywords

    Limit pricing; Non-renewable resource; Monopoly; Climate policy;
    All these keywords.

    JEL classification:

    • Q31 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Demand and Supply; Prices
    • Q37 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Issues in International Trade

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