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The War of Rare Earth Elements: A Dynamic Game Approach

Author

Listed:
  • Luisito Bertinelli

    (CREA, Université du Luxembourg)

  • Stéphane Poncin

    (CREA, Université du Luxembourg)

  • Benteng Zou

    (CREA, Université du Luxembourg)

Abstract

Rare earth elements govern today’s high-tech world and are deemed to be essential for the attainment of sustainable development goals. Since the 1990s, these elements have been predominantly supplied by one single actor, China. However, due to the increasing global relevance of their availability, other countries are now encouraged to enter the market. The objective of this paper is to analyze the strategic interactions among (potential) suppliers. In particular, we are interested in (1) the optimal timing for a newcomer (e. g. the U.S.) to enter the market, (2) the incumbent’s (i. e. China’s) optimal behavior, and (3) the cost-efficiency of cooperative vs. competitive market relations. By setting up a continuous-time dynamic game model, we show that (1) the newcomer should postpone the production launch until its rare earth reserves coincide with those of the incumbent, (2) the incumbent should strive for a late market entry and therefore keep its monopolistic resource extraction at the lowest possible level, (3) compared to the payoffs under competition, cooperation leads to a Pareto improvement when started at an early stage. The findings of our model are particularly relevant for the rational strategic positioning of the two great powers, America and China.

Suggested Citation

  • Luisito Bertinelli & Stéphane Poncin & Benteng Zou, 2019. "The War of Rare Earth Elements: A Dynamic Game Approach," DEM Discussion Paper Series 19-11, Department of Economics at the University of Luxembourg.
    • Handle: RePEc:luc:wpaper:19-11
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    File URL: https://hdl.handle.net/10993/39982
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    rare earth elements; dynamic games; open-loop strategic Nash equilibria.;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • Q3 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation

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