Long-Term Bilateral Monopoly: The Case of an Exhaustible Resource
Volume: Volume 17, No. 1
Issue: Spring 1986
Pages: pp. 89-104
Authors: Tracy Lewis, Robin Lindsey, and Roger Ware
Title: Long-Term Bilateral Monopoly: The Case of an Exhaustible Resource
Abstract: We construct a model of long-term bilateral competition between the supplier of an exhaustible resource and a consuming country capable of producing a perfect substitute for the resource. The technology for producing the substitute is known, and the strategy of the consuming country is to choose an investment program for installing the substitute. We derive equilibrium configurations of investment and extraction for the case of linear demand under three scenarios: (1) the resource supplier is a von Stackelberg leader; (2) the consuming country is a von Stackelberg leader; and (3) buyers and sellers of the resource engage each other period by period. A comparison of these cases reveals incentives for long-term commitment on the part of one or both parties and also suggests that there may be gains from strategic intervention into resource markets by governments of consuming nations.
JEL Classification
Microeconomics Theory of Firm and Industry under Imperfectly Competitive Market Structures (0226)
Natural Resources General (7210)