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(Monopolistic) resource extraction and limit pricing: The market penetration of competitively produced synfuels


  • Franz Wirl


This paper analyzes the market penetration of a competitively produced synfuel, e.g., solar energy, in a market that is initially dominated by a resource extracting monopoly. The availability of the renewable substitute depends not only on the price/cost ratio but also on the installed capacities, which reflect historical investments. As a consequence, the resource monopoly faces a discontinuous residual demand schedule. The dynamic interactions between the resource cartel and the synfuel industry are modelled as a differential game; the (open loop) Nash equilibrium is applied to this game. It will be shown that the commodity price will exceed the production costs of the backstop and that the transition from the periods of resource dependence to the backstop technology will be gradual. Copyright Kluwer Academic Publishers 1991

Suggested Citation

  • Franz Wirl, 1991. "(Monopolistic) resource extraction and limit pricing: The market penetration of competitively produced synfuels," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 1(2), pages 157-178, June.
  • Handle: RePEc:kap:enreec:v:1:y:1991:i:2:p:157-178
    DOI: 10.1007/BF00310016

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    References listed on IDEAS

    1. Heal, Geoffrey M., 1993. "The optimal use of exhaustible 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 18, pages 855-880 Elsevier.
    2. Stiglitz, Joseph E & Dasgupta, Partha, 1981. " Market Structure and Resource Extraction under Uncertainty," Scandinavian Journal of Economics, Wiley Blackwell, vol. 83(2), pages 318-333.
    3. Hoel, Michael, 1983. "Monopoly resource extractions under the presence of predetermined substitute production," Journal of Economic Theory, Elsevier, vol. 30(1), pages 201-212, June.
    4. Solow, Robert M, 1974. "The Economics of Resources or the Resources of Economics," American Economic Review, American Economic Association, vol. 64(2), pages 1-14, May.
    5. Wirl, Franz, 1988. "Resource extraction of imperfect substitutes," Energy Economics, Elsevier, vol. 10(3), pages 242-248, July.
    6. 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 1079-1093, October.
    7. Stephen W. Salant, 1977. "Staving off the backstop: dynamic limit-pricing with a kinked demand curve," International Finance Discussion Papers 110, Board of Governors of the Federal Reserve System (U.S.).
    8. Cremer, Jacques & Weitzman, Martin L., 1976. "OPEC and the monopoly price of world oil," European Economic Review, Elsevier, vol. 8(2), pages 155-164, August.
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    Cited by:

    1. Niko Jaakkola, 2013. "Putting OPEC Out of Business," OxCarre Working Papers 099, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
    2. Jouvet, Pierre-André & Schumacher, Ingmar, 2012. "Learning-by-doing and the costs of a backstop for energy transition and sustainability," Ecological Economics, Elsevier, vol. 73(C), pages 122-132.
    3. Wirl, Franz, 2008. "Resource extraction by cartels facing constraints on cooperation," Resource and Energy Economics, Elsevier, vol. 30(3), pages 409-427, August.
    4. Franz Wirl & Cees Withagen, 2000. "Complexities due to sluggish expansion of backstop technologies," Journal of Economics, Springer, vol. 72(2), pages 153-174, June.

    More about this item


    Resource depletion; synfuel; differential game;


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