Sustained, and at times successful attempts by exporters of exhaustible resources to exercise market power have increased the economic and political significance of these commodities. Existing models do not give a plausible description of non-renewable resource cartel-fringe markets because they typically assume that agents have constant production costs, and they use open-loop equilibria. In Discussion paper No 1291 Research Fellow Larry Karp and Olli Tahvonen extend the literature by using stock-dependent extraction costs, and more importantly they solve both the open-loop and the Markov-Perfect (subgame perfect) equilibria. They derive testable hypotheses concerning the effect of cartelization on the initial price and on the short- and long-run market shares.

Both 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. It is found that 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.

International Trade in Exhaustible Resources:
A Cartel-Competitive Fringe Model
Larry Karp and Olli Tahvonen

Discussion Paper No. 1291, January 1996 (IT)