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Strategic resource extraction and substitute development

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  • Michielsen, Thomas O.

Abstract

We analyze a dynamic game between a buyer and a seller of a nonrenewable 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.

Suggested Citation

  • Michielsen, Thomas O., 2014. "Strategic resource extraction and substitute development," Resource and Energy Economics, Elsevier, vol. 36(2), pages 455-468.
  • Handle: RePEc:eee:resene:v:36:y:2014:i:2:p:455-468
    DOI: 10.1016/j.reseneeco.2014.02.001
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    References listed on IDEAS

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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. Kneeseā€  & J. L. Sweeney (ed.), Handbook of Natural Resource and Energy Economics, edition 1, volume 3, chapter 19, pages 881-931 Elsevier.
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    More about this item

    Keywords

    Nonrenewable resource; Substitute; Innovation; Closed-loop equilibrium;

    JEL classification:

    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • Q30 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - General

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