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3032. Oligopoly Exploitation of Common-Pool Nonrenewable Resources: Price vs Quantity Competition

Invited abstract in session TA-36: Game Theory, Solutions and Structures V, stream Game Theory, Solutions and Structures.

Tuesday, 8:30-10:00
Room: 32 (building: 306)

Authors (first author is the speaker)

1. Luca Colombo
Finance and Accounting, Rennes School of Business
2. Paola Labrecciosa
ELS, ESSCA School of Management

Abstract

It is a well-known result in static oligopoly theory that the Bertrand equilibrium (simultaneous price competition) is more efficient than the Cournot equilibrium (simultaneous quantity competition): consumers surplus and social welfare are higher in the former than in the latter. In this paper, we reconsider the validity of this efficiency result in a continuous-time duopoly game where production requires exploitation of a common-pool resource. The paper closest to ours is Colombo and Labrecciosa (JET 2015, CL henceforth). As in CL, we assume that the extracted resource is used in the production of horizontally differentiated products a la Singh and Vives (RAND 1984). Unlike CL, we assume that the resource is nonrenewable, that the marginal extraction cost is decreasing in the resource stock, and that the goods can be either substitutes or complements. A key assumption in our nonrenewable resource model is that there exists economic rather than physical exhaustion. The equilibrium concept we use is Markov Perfect Equilibrium. We are interested in equilibrium harvesting rates, consumers surplus, profits, and social welfare in the two different market structures. In contrast with static oligopoly literature, we show analytically that price competition does not necessarily lead to larger output, lower profits, larger consumers surplus and social welfare.

Keywords

Status: accepted

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