DP1291 International Trade in Exhaustible Resources: A Cartel-Competitive Fringe Model
|Author(s):||Larry Karp, Olli Tahvonen|
|Publication Date:||January 1996|
|Keyword(s):||Cartel-fringe Model, Dynamic Games, Markov Perfect Equilibrium, Trade in Non-renewable Resources|
|Programme Areas:||International Trade and Regional Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=1291|
We characterize the open-loop and the Markov-Perfect Stackelberg equilibria for a differential game in which a cartel and a fringe extract a non-renewable resource. Both agents have stock dependent costs. The comparison of initial market shares, across different equilibria, depends on which firm has the cost advantage. The cartel's steady-state market share is largest in the open-loop equilibrium and the smallest in the competitive equilibrium. The initial price may be larger in the Markov equilibria (relative to the open-loop equilibrium), so less market power is consistent with an equilibrium that appears less competitive. The benefit to cartelization increases with market share.