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Learning and Price Volatility in Duopoly Models of Resource Depletion

Author

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  • Martin Ellison
  • Andrew Scott

Abstract

We introduce learning into a Hotelling model of a non-renewable resource market. Bycombining learning and scarcity we add signi?cantly to the dynamics implied by learning and substantially enhance the volatility of commodity prices. In our learning model we show how a self con?rming equilibrium exists but is not constant over time. As scarcity increases the SCE shifts from a non-cooperative rational expectations equilibrium to a cooperative rational expectations outcome. As a result prices trend at a rate faster that the rate of time preference. We show the existence of escape dynamics which generate substantial volatility in commodity prices despite the fact the model is subject only to i.i.d shocks. The shifting SCE signi?cantly alters escape dynamics with the time to escape shortening and the magnitude of dynamics reducing as scarcity rises. In terms of the Hotelling model, a shifting SCE and variable escape dynamics introduces greater volatility at low frequencies and substantially larger cyclical volatility. These price ?uctuations show sharp upward breaks in price and non-linear, non-stationary and asymmetric price ?uctuations. We show these results are robust to a range of extensions, including extractions costs, stochastic shifts in demand and learning assumptions closer to rational expectations.

Suggested Citation

  • Martin Ellison & Andrew Scott, 2009. "Learning and Price Volatility in Duopoly Models of Resource Depletion," OxCarre Working Papers 025, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  • Handle: RePEc:oxf:oxcrwp:025
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    References listed on IDEAS

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    Cited by:

    1. Batlome Janjgava & Sergey Slobodyan, 2011. "Duopoly Competition, Escape Dynamics and Non-cooperative Collusion," CERGE-EI Working Papers wp445, The Center for Economic Research and Graduate Education - Economics Institute, Prague.

    More about this item

    Keywords

    Commodity Prices; Escape Dynamics; Hotelling; Learning; Scarcity; Self Con?rming Equilibria;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • Q31 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Demand and Supply; Prices

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