Cartel Behaviour in an Exhaustible Resource Industry

Abstract

Under low-elasticity demand, a resource monopoly is supposed to be constrained either by the presence of competing participants in the market or by the existence of a substitute for the natural resource. In the presence of a competitive fringe, the cartel’s activity in an exhaustible resource industry violates the Herfindahl principle presented in Chap. 2 that an advantageous oil region depletes its resource stock before a disadvantageous region begins extraction. In the cartel-fringe models of resource industry considered in this chapter, the time sequencing of production dramatically changes and permits the case where the low-cost cartel and the high-cost fringe produce simultaneously. In the presence of a backstop technology, a perfect substitute provides a ceiling on the exhaustible resource price. In the model with such technology, the fringe fully exhausts its resource before the cartel becomes a monopoly that sells the resource at the backstop price. The cartel initially makes a strategic choice of resource allocation over time between the transition phase and the backstop phase.