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Capacity Constraints and Destructive Competition in the Extraction of Non-Renewable Natural Resources

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  • Olewiler, Nancy D.

Abstract

The effects of two practical features associated with the extraction of a non-renewable natural resource on the behavior of a resource firm and industry are examined. These features are capacity and minimum efficient scale constraints. It is shown that these constraints can give rise to a phenomenon known as destructive competition. If destructive competition occurs, a perfect foresight equilibrium will not exist because the set of intertemporal shadow prices for the resource will not be sustainable by competitive behavior of firms. It is then shown that each firm's extraction path over time will be affected by these constraints and will have regions where the market price of the resource is constant. Possible time paths of momentary equilibria in a resource market are then derived when firms expectations about the resource price path are incorrect due to capacity constraints and destructive competition. Examples of destructive competition and its policy implications are also presented.

Suggested Citation

  • Olewiler, Nancy D., 1981. "Capacity Constraints and Destructive Competition in the Extraction of Non-Renewable Natural Resources," Queen's Institute for Economic Research Discussion Papers 275193, Queen's University - Department of Economics.
    • Handle: RePEc:ags:queddp:275193
    DOI: 10.22004/ag.econ.275193
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    References listed on IDEAS

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    1. David L. McNicol, 1975. "The Two Price Systems in the Copper Industry," Bell Journal of Economics, The RAND Corporation, vol. 6(1), pages 50-73, Spring.
    2. Harold Hotelling, 1931. "The Economics of Exhaustible Resources," Journal of Political Economy, University of Chicago Press, vol. 39(2), pages 137-137.
    3. Russell Davidson & Richard Harris, 1981. "Non-Convexities in Continuous Time Investment Theory," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 48(2), pages 235-253.
    4. Harry F. Campbell, 1980. "The Effect of Capital Intensity on the Optimal Rate of Extraction of a Mineral Deposit," Canadian Journal of Economics, Canadian Economics Association, vol. 13(2), pages 349-356, May.
    5. Pindyck, Robert S, 1978. "Gains to Producers from the Cartelization of Exhaustible Resources," The Review of Economics and Statistics, MIT Press, vol. 60(2), pages 238-251, May.
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    1. Eswaran, Mukesh & Lewis, Tracy R & Heaps, Terry, 1983. "On the Nonexistence of Market Equilibria in Exhaustible Resource Markets with Decreasing Costs," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 154-167, February.

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