Is the monopolist the friend of the conservationist? Two remarks on the Hotelling-Solow paradox

Abstract

In this paper, we consider the efficient use of an exhaustible resource. The well known Hotelling-Solow paradox states that the monopolist is the friend of resource conservationist. We examine it from two different aspects. One is from the aspect of uncertainty, especially the uncertainty of demand fluctuation. The other is from the market competitive effect given by the probability of entry of a competing supplier. We show that such uncertain factors as demand fluctuations are crucial determinants of the extraction policy of the resource owner. There may be a case in which the Hotelling-Solow paradox does not hold. The risk factor might cause the resource owner to discount the existing amount of resource stock. This serves to establish a counterexample to the Hotelling-Solow paradox. Secondly, market competitive power works against resource conservation. The resource owner's optimal pricing policy is developed under the assumption that the entry probability is a non-decreasing function of the resource price and the objective is present value maximization. It is shown that the optimal pre-entry price is set lower than the one in the case without uncertain entry. In this sense, the resource is exhausted more rapidly and there is a possibility for market power working against conservation.