Monopoly Extraction under Performance Constraints

Peter Read and Alistair Ulph

Bulletin of Economic Research, 1989, vol. 41, issue 2, 107-22

Abstract: Two simple forms of performance constraint--fixed price/output ("take or pay" contracting) and fixed exhaustion date--are analyzed as regards monopolist's behavior and host nation's welfare, assuming linear demand. An early exhaustion date can cause the monopolist to set a falling price. Welfare is improved under exhaustion-date constraint by shifting towards the competitive exhaustion date, with the optimum earlier still. But, with large resources, exhaustion-date constraint is inferior to "take or pay." The significance of institutional aspects is discussed and an appendix demonstrates limited generalization of the falling-price result. Copyright 1989 by Blackwell Publishing Ltd and the Board of Trustees of the Bulletin of Economic Research

Date: 1989
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