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Estimation of Market Power in a Nonrenewable Resource Industry

  • Gregory M. Ellis
  • Robert Halvorsen
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    In nonrenewable resource industries, the existence of a markup of price over marginal market cost may reflect the existence of an implicit user cost for the resource rather than market power. We show that valid estimates of market power can be obtained by the joint estimation of a restricted cost function and an inverse supply relation. Estimation of the model with data for the largest firm in the international nickel industry indicates that output price substantially exceeded marginal market cost, with most of the difference due to the exercise of market power rather than the user cost of the resource.

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    Article provided by University of Chicago Press in its journal Journal of Political Economy.

    Volume (Year): 110 (2002)
    Issue (Month): 4 (August)
    Pages: 883-899

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    Handle: RePEc:ucp:jpolec:v:110:y:2002:i:4:p:883-899
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    1. Cairns, Robert D., 1985. "Nickel depletion and pricing: Further considerations," Journal of Environmental Economics and Management, Elsevier, vol. 12(4), pages 395-396, December.
    2. Pindyck, Robert S., 1984. "The measurement of monopoly power in dynamic markets," Working papers 1540-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    3. Stollery, Kenneth R., 1985. "User costs versus markups as determinants of prices in the nickel industry: reply," Journal of Environmental Economics and Management, Elsevier, vol. 12(4), pages 397-400, December.
    4. Halvorsen, Robert & Smith, Tim R, 1986. "Substitution Possibilities for Unpriced Natural Resources: Restricted Cost Functions for the Canadian Metal Mining Industry," The Review of Economics and Statistics, MIT Press, vol. 68(3), pages 398-405, August.
    5. Farrow, Scott, 1985. "Testing the Efficiency of Extraction from a Stock Resource," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 452-87, June.
    6. Cairns, Robert D., 1986. "More on depletion in the nickel industry," Journal of Environmental Economics and Management, Elsevier, vol. 13(1), pages 93-98, March.
    7. Harold Hotelling, 1931. "The Economics of Exhaustible Resources," Journal of Political Economy, University of Chicago Press, vol. 39, pages 137.
    8. Denise Young, 1992. "Cost Specification and Firm Behaviour in a Hotelling Model of Resource Extraction," Canadian Journal of Economics, Canadian Economics Association, vol. 25(1), pages 41-59, February.
    9. Robert D. Cairns, 1981. "An Application of Depletion Theory to a Base Metal: Canadian Nickel," Canadian Journal of Economics, Canadian Economics Association, vol. 14(4), pages 635-48, November.
    10. Halvorsen, Robert & Smith, Tim R, 1984. "On Measuring Natural Resource Scarcity," Journal of Political Economy, University of Chicago Press, vol. 92(5), pages 954-64, October.
    11. Stollery, Kenneth R., 1983. "Mineral depletion with cost as the extraction limit: A model applied to the behavior of prices in the nickel industry," Journal of Environmental Economics and Management, Elsevier, vol. 10(2), pages 151-165, June.
    12. Appelbaum, Elie, 1979. "Testing price taking behavior," Journal of Econometrics, Elsevier, vol. 9(3), pages 283-294, February.
    13. Jeffrey A. Krautkraemer, 1998. "Nonrenewable Resource Scarcity," Journal of Economic Literature, American Economic Association, vol. 36(4), pages 2065-2107, December.
    14. David Levhari & Nissan Liviatan, 1977. "Notes on Hotelling's Economics of Exhaustible Resources," Canadian Journal of Economics, Canadian Economics Association, vol. 10(2), pages 177-92, May.
    15. Pindyck, Robert S., 1987. "On monopoly power in extractive resource markets," Journal of Environmental Economics and Management, Elsevier, vol. 14(2), pages 128-142, June.
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