Rare Earth Elements: A game between China and the rest of the world

Behnaz Minooei Fard, Willi Semmler and Giovanni Di Bartolomeo ()

No 235, Working Papers in Public Economics from Department of Economics and Law, Sapienza University of Roma

Abstract: The economics of rare earth elements (REEs) has become a critical issue due to the growing demand for these crucial materials in the transition to renewable energies. The monopolistic structure of the REE market dominated by China and its unstable supply of REEs has raised concerns globally about potential supply chain disruptions. With the largest REE reserves and refining capacity, China exerts market power, causing supply chain problems and price volatility. However, China's growing consumption of REEs may exceed its domestic production and lose its control over the supply since other countries move into the market. This paper uses a game-theoretic stylization to examine competition between China and the rest of the world (ROW). We investigate how China uses a limit-pricing mechanism to prevent the entrance of fringe firms from the ROW and show how the ROW is limited to quantity adjustments. We also examine the market's transformation from a monopoly to a foreseeable duopoly. The focus is on the supply side of the market, the resource extraction by China and the ROW, and the depletion of the discovered resources. Additionally, we assess the role of the impact of marginal costs and supporting policies on these dynamics. Our model variants are solved numerically using the moving-horizon strategy in differential games provided by the non-linear model predictive control (NMPC) technique, allowing us to predict the outcome of the interaction between China and the ROW and the impact of their decision-making.

Keywords: Rare earth elements; differential games; non-linear model predictive control (search for similar items in EconPapers)
JEL-codes: C61 C7 Q3 (search for similar items in EconPapers)
Pages: 34
Date: 2023-02
New Economics Papers: this item is included in nep-cna, nep-com, nep-ene and nep-gth
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