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(Monopolistic) resource extraction and limit pricing: The market penetration of competitively produced synfuels

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Abstract

This paper analyzes the market penetration of a competitively produced synfuel, e.g., solar energy, in a market that is initially dominated by a resource extracting monopoly. The availability of the renewable substitute depends not only on the price/cost ratio but also on the installed capacities, which reflect historical investments. As a consequence, the resource monopoly faces a discontinuous residual demand schedule. The dynamic interactions between the resource cartel and the synfuel industry are modelled as a differential game; the (open loop) Nash equilibrium is applied to this game. It will be shown that the commodity price will exceed the production costs of the backstop and that the transition from the periods of resource dependence to the backstop technology will be gradual.

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Authors and Affiliations

  1. Institute of Energy Economics, University of Technology, Vienna, Austria

    Franz Wirl

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  1. Franz Wirl
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Wirl, F. (Monopolistic) resource extraction and limit pricing: The market penetration of competitively produced synfuels. Environmental and Resource Economics 1, 157–178 (1991). https://doi.org/10.1007/BF00310016

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