Strategic resource extraction and substitute development

Thomas O. Michielsen

Resource and Energy Economics, 2014, vol. 36, issue 2, 455-468

Abstract: We analyze a dynamic game between a buyer and a seller of a nonrenewable resource. The seller chooses resource supply; the buyer can pay a fixed cost to invent a perfect substitute for the resource at any time. In closed-loop equilibrium, the buyer adopts the substitute when the resource is exhausted. Investing makes the buyer worse off because it decreases resource supply, destroys his ability to derive surplus from the resource through delaying the investment cost incurrence, and causes a larger share of the resource stock to be sold at his reservation price. From the seller's perspective, the buyer's ability to develop a substitute is equivalent to an already available substitute with a higher marginal cost.

Keywords: Nonrenewable resource; Substitute; Innovation; Closed-loop equilibrium (search for similar items in EconPapers)
JEL-codes: O30 Q30 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:resene:v:36:y:2014:i:2:p:455-468

DOI: 10.1016/j.reseneeco.2014.02.001

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