Working Paper: CEPR ID: DP1291
Authors: Larry Karp; Olli Tahvonen
Abstract: 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.
Keywords: trade in nonrenewable resources; cartel-fringe model; dynamic games; Markov perfect equilibrium
JEL Codes: D43; D99; F12; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| open-loop equilibrium (C62) | cartel's steady-state market share (D43) |
| competitive equilibrium (D41) | cartel's steady-state market share (D43) |
| Markov equilibria (D51) | initial price (D44) |
| less competitive appearance (L13) | market power (L11) |
| market share (L17) | benefits of cartelization (L12) |
| open-loop equilibrium (C62) | consumer welfare (D69) |