Handbook of Environmental and Resource Economics
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Handbook of Environmental and Resource Economics

Edited by Jeroen C.J.M. van den Bergh

This major reference book comprises specially commissioned surveys in environmental and resource economics written by an international team of experts. Authoritative yet accessible, each entry provides a state-of-the-art summary of key areas that will be invaluable to researchers, practitioners and advanced students.
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Chapter 4: Imperfect Competition in Natural Resource Markets

C. Withagen and A. de Zeeuw


Cees Withagen and Aart de Zeeuw 1. Introduction This chapter intends to survey the results of theoretical models on the extraction of an exhaustible natural resource in the tradition of Hotelling (1931). The main focus will be on the differences in extraction schedules resulting from different market structures for the suppliers of the resource. The approach is analytical and combines the dynamics of resource extraction with imperfect competition on the supply side. Special attention will be given to an oligopolistic structure with one big coherent cartel and a large number of small suppliers which was introduced in the literature in the 1970s due to the developments on the oil market. In order to allow a complete analysis, the basic model is simple in all other aspects. The suppliers are profit maximizers, demand is linear, the market will clear, the resource stocks are given at the initial time and the marginal extraction costs are constant. We do not deal with exploration (see for example Devarajan and Fisher, 1980). Also the important issue of innovation and backstop technologies will not be covered (see for example Hoel, 1978, Heal, 1976 and Dasgupta et al., 1982). Finally, we do not address the question of internal stability of the cartel, although this is obviously important in the explanation of the events that have occurred on the oil market. This chapter is restricted to an exposition of the theory. No attempt is made to confront the results with observations on markets for exhaustible resources (see for...

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