Abstract
This article provides an overview of the literature on strategic behavior and nonrenewable resources. We show how market power leads to higher resource prices and in the presence of fringe competitive firms, to increased industry concentration over time. Competitive firms may actually benefit from the presence of a monopoly through higher resource prices. We examine the notion of strategic resource dependence – what parameters determine a country's decision to continue to import a vital, nonrenewable resource such as crude oil, or invest in a substitute? We show that various considerations, such as the ease with which a substitute can be used and its cost, affect the supply decision of a monopoly supplier. The supplier may provide an increasing amount of resource over time, in order to prevent the buyer from investing in a substitute. Finally, we review the empirical literature on estimating market power and discuss its limitations especially in separating out the effect of scarcity from market power, since both affect the resource price–cost margin. We conclude by pointing out an interesting avenue for further empirical research.
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