Cartel and Oligopoly Pricing of Nonreplenishable Natural Resources

  • Tracy R. Lewis
  • Richard Schmalensee
Part of the Mathematical Concepts and Methods in Science and Engineering book series (MCSENG)


Few real-world market structures correspond well to either of the textbook polar cases of absolute monopoly and perfect competition. Formal models of two intermediate structures have been thoroughly and usefully analyzed under static conditions.† The first model assumes that a single firm or a stable cartel controls a sizable fraction of industry capacity and faces a competitive fringe of many small suppliers, each too tiny to have any noticeable effect on market price. Fringe members thus take price as beyond their control and choose output to maximize profit. The dominant firm or cartel maximizes its profit subject to the constraint imposed by fringe supply behavior. The second model deals with noncooperative or Cournot-Nash oligopoly. A finite number of sellers is assumed, each large enough to have some control over price. Market equilibrium is defined as a situation in which no individual seller can increase its profits by changing only its own output, given the outputs of the other sellers.


Nash Equilibrium Equilibrium Price Inventory Level Market Equilibrium Marginal Revenue 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. 1.
    Scherer, F. M., Industrial Market Structure and Economic Performance, Rand-McNalley, Chicago, 1970.Google Scholar
  2. 2.
    Clark, C., Restricted Entry to Common Property Fishery Resources: A Game Theoretic Analysis, Technical Report No. 78–9, The Institute of Applied Mathematics and Statistics, University of British Columbia, 1978.Google Scholar
  3. 3.
    Levhari, D. and Mirman, L., The Great Fish War: An Example Using Dynamic Cournot—Nash Solution, Department of Economics, University of Illinois, Urbana, 1977.Google Scholar
  4. 4.
    Stiglttz, J. E., Monopoly and the rate of extraction of exhaustible resources, American Economic Review, Vol. 66, pp. 655–661, 1976.Google Scholar
  5. 5.
    Hoteiïing, H., The economics of exhaustible resources, Journal of Political Economy, Vol. 39, pp. 137–175, 1931.Google Scholar
  6. 6.
    Salant, S. W., Exhaustible resources and industrial structure; A Nash—Cournot approach to the world oil market, Journal of Political Economy, Vol. 84, pp. 1079–1093, 1976.CrossRefGoogle Scholar
  7. 7.
    Pindyck, R. S., Cartel pricing and the structure of the world bauxite market, Bell Journal of Economics, Vol. 8, pp. 343–360, 1977.CrossRefGoogle Scholar
  8. 8.
    Pindyck, R. S., Gains to producers from the cartelization of exhaustible resources, Review of Economics and Statistics, Vol. 60, pp. 238–251, 1978.CrossRefGoogle Scholar
  9. 9.
    Eckbo, P. L., The Future of World Oil, Ballinger, Cambridge, Mass., 1976.Google Scholar
  10. 10.
    Hynilicza, E. and Pindyck, R., Pricing policies for a two-part exhaustible resource cartel: The case of OPEC, European Economic Review, Vol. 8, pp. 139–154, 1976.CrossRefGoogle Scholar
  11. 11.
    Kosbud, R. F. and Stokes, H. H., Economic Analysis of OPEC Using a Markov Model, Department of Economics, University of Illinois, Chicago, 1977.Google Scholar
  12. 12.
    Pakravan, K., The Theory of Exhaustible Resources and Market Organization with an Application of Oil and OPEC, Department of Economics, University of Chicago, Ph.D. Dissertation, 1976.Google Scholar
  13. 13.
    Schmalensee, R., Is more competition necessarily good? Industrial Organization Review, Vol. 4, pp. 120–121, 1976.Google Scholar
  14. 14.
    Hartwick, J., Exploitation of many deposits of an exhaustible resource, Econometrics, Vol. 46, pp. 201–219, 1977.CrossRefGoogle Scholar
  15. 15.
    Lewis, T. R. and SCHMALENSEE, R. L., Cartel Deception in Nonrenewable Resource Markets, Working Paper No. 1010–78, Massachusetts Institute of Technology, July 1978.Google Scholar

Supplementary References

  1. Nlcxols, A. L. and Zeckhauser, R., Stockpiling strategies and cartel prices, Bell Journal of Economics, Vol. 8, pp. 66–96, 1977.CrossRefGoogle Scholar
  2. Rader, T., Theory of Microeconomics, Academic Press, New York, 1972.Google Scholar
  3. Schmalensee, R, Resource exploitation theory and the behavior of the oil cartel, European Economic Review, Vol. 7, pp. 257–279, 1976.CrossRefGoogle Scholar

Copyright information

© Plenum Press, New York 1980

Authors and Affiliations

  • Tracy R. Lewis
    • 1
  • Richard Schmalensee
    • 2
  1. 1.Department of EconomicsUniversity of ArizonaTucsonUSA
  2. 2.Sloan School of ManagementMassachusetts Institute of TechnologyCambridgeUSA

Personalised recommendations