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Strategic resource extraction and substitute development

Listed author(s):
  • Michielsen, Thomas O.
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    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.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0928765514000256
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    Article provided by Elsevier in its journal Resource and Energy Economics.

    Volume (Year): 36 (2014)
    Issue (Month): 2 ()
    Pages: 455-468

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    Handle: RePEc:eee:resene:v:36:y:2014:i:2:p:455-468
    DOI: 10.1016/j.reseneeco.2014.02.001
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505569

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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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    5. Kenji Fujiwara & Ngo Long, 2011. "Welfare Implications of Leadership in a Resource Market under Bilateral Monopoly," Dynamic Games and Applications, Springer, vol. 1(4), pages 479-497, December.
    6. 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 429-446, August.
    7. Simon, Leo K & Stinchcombe, Maxwell B, 1989. "Extensive Form Games in Continuous Time: Pure Strategies," Econometrica, Econometric Society, vol. 57(5), pages 1171-1214, September.
    8. Kenji Fujiwara & Ngo Van Long, 2012. "Optimal Tariffs On Exhaustible Resources: The Case Of Quantity-Setting," International Game Theory Review (IGTR), World Scientific Publishing Co. Pte. Ltd., vol. 14(04), pages 1-17.
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    10. Niko Jaakkola, 2013. "Putting OPEC Out of Business," OxCarre Working Papers 099, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
    11. Hoel, Michael, 1978. "Resource extraction, substitute production, and monopoly," Journal of Economic Theory, Elsevier, vol. 19(1), pages 28-37, October.
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    13. Olsen, Trond E., 1993. "Perfect equilibrium timing of a backstop technology Limit pricing induced by trigger zones," Journal of Economic Dynamics and Control, Elsevier, vol. 17(1-2), pages 123-151.
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