Mothballing in a Duopoly: Evidence from a (Shale) Oil Market

Nicola Comincioli, Verena Hagspiel, Peter Kort, Francesco Menoncin, Raffaele Miniaci and Sergio Vergalli
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Nicola Comincioli: University of Brescia and Fondazione Eni Enrico Mattei
Verena Hagspiel: Norwegian University of Science and Technology
Francesco Menoncin: University of Brescia

No 2020.18, Working Papers from Fondazione Eni Enrico Mattei

Abstract: The mothballing option has been studied in the literature, but mainly in decision theoretic frameworks. This paper looks at it from a strategic point of view and applies it to an incumbent-entrant framework. In particular, based on the recent strategic interactions between OPEC and the shale oil industry, we conduct a case study where the incumbent OPEC is a exible producer that competes with a representative shale oil firm. Upon entry, the latter produces a fixed amount but it can apply the mothballing option in times of low demand. Our main results are threefold. First, we find that under low demand uncertainty, the mothballing option has a negative e ect on the value of the entrant. Second, a large market share of the entrant will stimulate mothballing, caused by a so-called squeeze strategy of the incumbent. Third, our empirical analysis of the (shale) oil market learns that a higher demand elasticity induces mothballing.

Keywords: Crude Oil; Shale Oil; Mothballing; OPEC; Output Game (search for similar items in EconPapers)
JEL-codes: L12 L71 Q41 (search for similar items in EconPapers)
Date: 2020-11
New Economics Papers: this item is included in nep-com and nep-ene
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Related works:
Journal Article: Mothballing in a Duopoly: Evidence from a (Shale) Oil Market (2021)
Working Paper: Mothballing in a Duopoly: Evidence from a (Shale) Oil Market (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:fem:femwpa:2020.18

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