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

25 Pages Posted: 6 Nov 2020

See all articles by Nicola Comincioli

Nicola Comincioli

University of Brescia

Verena Hagspiel

Norwegian University of Science and Technology (NTNU) - Department of Industrial Economics and Technology

Peter M. Kort

Tilburg University - Department of Econometrics & Operations Research; Tilburg University - Center for Economic Research (CentER)

Francesco Menoncin

University of Brescia

Raffaele Miniaci

University of Brescia - Department of Economics and Management

Sergio Vergalli

University of Brescia - Department of Economics; Fondazione Eni Enrico Mattei (FEEM), Milan

Date Written: November 6, 2020

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 effect 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.

Keywords: Crude Oil, Shale Oil, Mothballing, OPEC, Output Game

JEL Classification: L12, L71, Q41

Suggested Citation

Comincioli, Nicola and Hagspiel, Verena and Kort, Peter and Menoncin, Francesco and Miniaci, Raffaele and Vergalli, Sergio, Mothballing in a Duopoly: Evidence from a (Shale) Oil Market (November 6, 2020). FEEM Working Paper No. 18.2020, Available at SSRN: https://ssrn.com/abstract=3726034 or http://dx.doi.org/10.2139/ssrn.3726034

Nicola Comincioli (Contact Author)

University of Brescia ( email )

Piazza del Mercato, 15
25122 Brescia
Italy

Verena Hagspiel

Norwegian University of Science and Technology (NTNU) - Department of Industrial Economics and Technology ( email )

NO-7491 Trondheim
Norway

Peter Kort

Tilburg University - Department of Econometrics & Operations Research ( email )

Tilburg, 5000 LE
Netherlands
+31 13 466 2062 (Phone)
+31 13 466 3072 (Fax)

HOME PAGE: http://center.uvt.nl/staff/kort/

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2062 (Phone)
+31 13 466 3072 (Fax)

Francesco Menoncin

University of Brescia

Piazza del Mercato, 15
25122 Brescia
Italy

Raffaele Miniaci

University of Brescia - Department of Economics and Management ( email )

Via San Faustino 74B
Brescia, 25122
Italy

Sergio Vergalli

University of Brescia - Department of Economics ( email )

Via San Faustino 74B
Brescia, 25122
Italy

Fondazione Eni Enrico Mattei (FEEM), Milan ( email )

Corso Magenta 63
20123 Milan
Italy

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