Short Run Effects of Bleaker Prospects for Oligopolistic Producers of a Non-Renewable Resource
33 Pages Posted: 5 Feb 2014
Date Written: January 30, 2014
In a non-renewable resource market with imperfect competition, both the resource rent and current prices influence a large resource owner’s optimal supply. New information regarding future market conditions that affect the resource rent will consequently impact current supply. Bleaker demand prospects tend to accelerate resource extraction. A more pessimistic outlook for future demand may, however, slow down the early resource extraction of producers with sufficiently large resource stocks and thus more limited resource rent, because the supply from these producers is driven more by current market considerations than by changes in the resource rent. As producers with relatively smaller resource stocks accelerate their supply in response to bleaker demand prospects, producers with sufficiently large resource stocks will reduce their current supply. A numerical model of the European gas market illustrates that the effect of the shale gas revolution is an accelerated supply by most gas producers, but a reduced supply by Russia who loses market shares even before the additional gas enters the market.
Keywords: resource extraction, Cournot competition, European gas market
JEL Classification: Q310, Q330, Q420
Suggested Citation: Suggested Citation