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
JEL(s): D12, E21
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.