Market Structure and Supply Shocks: Evidence from Mining Disasters

Abstract

This paper provides new evidence on how imperfectly competitive markets with excess capacity mitigate the adverse impact of supply shocks on prices. We study the potash market, which is controlled by a syndicate that assigns output quotas in proportion to production capacity of its members. This sharing rule creates incentives for excess capacity investment. Hence, it insulates the market from the impact of extreme events. Using a novel data set of potash mine disasters, we show that permanent or long-term loss of up to 4% of global or 20% of country production capacity does not affect the production levels and the commodity prices.

Keywords: commodity prices, supply shocks, market structure, resilience, syndicates

JEL Classification: Q31, L13, Q54, L72