The global markets for coking coal and iron ore — Complementary goods, integrated mining companies and strategic behavior

Harald Hecking and Timo Panke

Energy Economics, 2015, vol. 52, issue PA, 26-38

Abstract: The global market for coking coal is linked to the global market for iron ore since both goods are complementary inputs in pig iron production. Moreover, international trade of both commodities is highly concentrated, with only a few large companies active on both input markets. Given this setting, the paper presented investigates the strategy of quantity-setting (Cournot) mining companies that own both a coking coal and an iron ore division. Do these firms optimize the divisions' output on a firm level or by each division separately (division-by-division)? First, using a theoretical model of two Cournot duopolies of complementary goods, we find that there exists a critical capacity constraint below/above at which firm-level optimization results in identical/superior profits compared with division-level optimization. Second, by applying a spatial multi-input equilibrium simulation model of the coking coal and iron ore markets, we find that due to the limited capacity firms gain no (substantial) additional benefit from optimizing output on a firm level.

Keywords: Cournot oligopolies; Parallel vertical integration; Complementary inputs; Applied industrial organization; Mixed complementarity problem (search for similar items in EconPapers)
JEL-codes: C61 D43 L22 Q31 Q41 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:52:y:2015:i:pa:p:26-38

DOI: 10.1016/j.eneco.2015.09.005

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