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Mothballing in a Duopoly: Evidence from a (Shale) Oil Market

Author

Listed:
  • Nicola Comincioli

    (University of Brescia and Fondazione Eni Enrico Mattei)

  • Verena Hagspiel

    (Norwegian University of Science and Technology)

  • Peter M. Kort

    (Tilburg University and University of Antwerp)

  • Francesco Menoncin

    (University of Brescia)

  • Raffaele Miniaci

    (University of Brescia)

  • Sergio Vergalli

    (University of Brescia and Fondazione Eni Enrico Mattei)

Abstract

The mothballing option has been studied in the literature, but mainly in decision theoretic frameworks. This paper looks at it from a strategic point of view and applies it to an incumbent-entrant framework. In particular, based on the recent strategic interactions between OPEC and the shale oil industry, we conduct a case study where the incumbent OPEC is a exible producer that competes with a representative shale oil firm. Upon entry, the latter produces a fixed amount but it can apply the mothballing option in times of low demand. Our main results are threefold. First, we find that under low demand uncertainty, the mothballing option has a negative e ect on the value of the entrant. Second, a large market share of the entrant will stimulate mothballing, caused by a so-called squeeze strategy of the incumbent. Third, our empirical analysis of the (shale) oil market learns that a higher demand elasticity induces mothballing.

Suggested Citation

  • Nicola Comincioli & Verena Hagspiel & Peter M. Kort & Francesco Menoncin & Raffaele Miniaci & Sergio Vergalli, 2020. "Mothballing in a Duopoly: Evidence from a (Shale) Oil Market," Working Papers 2020.18, Fondazione Eni Enrico Mattei.
    • Handle: RePEc:fem:femwpa:2020.18
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    More about this item

    Keywords

    Crude Oil; Shale Oil; Mothballing; OPEC; Output Game;
    All these keywords.

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L71 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Mining, Extraction, and Refining: Hydrocarbon Fuels
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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