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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

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File URL: http://hdl.handle.net/10.1007/BF00310016
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Article provided by European Association of Environmental and Resource Economists in its journal Environmental & Resource Economics.

Volume (Year): 1 (1991)
Issue (Month): 2 (June)
Pages: 157-178

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Handle: RePEc:kap:enreec:v:1:y:1991:i:2:p:157-178
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  1. 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.).
  2. Stiglitz, Joseph E & Dasgupta, Partha, 1981. " Market Structure and Resource Extraction under Uncertainty," Scandinavian Journal of Economics, Wiley Blackwell, vol. 83(2), pages 318-33.
  3. 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.
  4. repec:cup:cbooks:9780521297615 is not listed on IDEAS
  5. Wirl, Franz, 1988. "Resource extraction of imperfect substitutes," Energy Economics, Elsevier, vol. 10(3), pages 242-248, July.
  6. Heal, G., 1990. "The Optimal Use Of Exhaustible Resources," Papers fb-_90-10, Columbia - Graduate School of Business.
  7. 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.
  8. 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.
  9. 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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