Abstract
This paper considers an exhaustible resource market where firms realize economies of scale in the production of the resource, and may augment reserves through exploration. With the non-convexities inherent in this model, the typical firm's optimal decisions are corner solutions. It either operates at full intensity or not at all. Firms with larger current reserves have a greater incentive to produce today; firms with smaller reserves will tend to hold their reserves for production at a later date. It follows that the market supply curve in any given period is a step function. As price rises, production increases discontinuously: at discrete intervals, the marginal firm will change from not producing today to producing all of its reserves. With such a supply curve, the market may or may not clear. Simulation of this model suggests: (i) the chance of market clearing in any period is near 1/2; (ii) such an industry is unlikely to exhibit a significant increase in concentration over time.
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Additional information
Department of Economics, University of Wyoming, Laramie, WY 82071. I thank d'Arge, Bruce Forster, Ed Gallick, Jack Multi, and Todd Sander for helful coments. Any remaining errors are my responsibility.
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Mason, C.F. On scale economies and exhaustible resource markets. Rev Ind Organ 2, 144–159 (1985). https://doi.org/10.1007/BF02354218
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DOI: https://doi.org/10.1007/BF02354218