The War of Rare Earth Elements: A Dynamic Game Approach

Luisito Bertinelli, Stéphane Poncin () and Benteng Zou
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Stéphane Poncin: CREA, Université du Luxembourg

DEM Discussion Paper Series from Department of Economics at the University of Luxembourg

Abstract: Rare earth elements govern today’s high-tech world and are deemed to be essential for the attainment of sustainable development goals. Since the 1990s, these elements have been predominantly supplied by one single actor, China. However, due to the increasing global relevance of their availability, other countries are now encouraged to enter the market. The objective of this paper is to analyze the strategic interactions among (potential) suppliers. In particular, we are interested in (1) the optimal timing for a newcomer (e. g. the U.S.) to enter the market, (2) the incumbent’s (i. e. China’s) optimal behavior, and (3) the cost-efficiency of cooperative vs. competitive market relations. By setting up a continuous-time dynamic game model, we show that (1) the newcomer should postpone the production launch until its rare earth reserves coincide with those of the incumbent, (2) the incumbent should strive for a late market entry and therefore keep its monopolistic resource extraction at the lowest possible level, (3) compared to the payoffs under competition, cooperation leads to a Pareto improvement when started at an early stage. The findings of our model are particularly relevant for the rational strategic positioning of the two great powers, America and China.

Keywords: rare earth elements; dynamic games; open-loop strategic Nash equilibria. (search for similar items in EconPapers)
JEL-codes: C61 C7 Q3 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-com, nep-env, nep-gth and nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:luc:wpaper:19-11

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