We consider a situation where an exhaustible-resource seller faces demand from a buyer who has a substitute but there is a time-to-build delay for the substitute. We find that in this simple framework the basic implications of the Hotelling model (1931) are reversed: over time the stock declines but supplies increase up to the point where the buyer decides to switch. Under such a threat of demand change, the supply does not reflect the current resource scarcity but it compensates the buyer for delaying the transition to the substitute. The analysis suggests a perspective on costs of oil dependence.
|Journal||Journal of Economic Theory|
|Publication status||Published - 2011|