Strategic Resource Extraction And Substitute Development

T.O. Michielsen

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Abstract

Abstract We analyze a dynamic game between a buyer and a seller of an exhaustible resource. The seller chooses resource supply; the buyer can pay a fixed cost to invent a perfect substitute for the resource at any time. In closed-loop equilibrium, the buyer adopts the substitute when the resource is exhausted. Investing makes the buyer worse off because it decreases resource supply, destroys his ability to derive surplus from the resource through delaying the investment cost incurrence, and causes a larger share of the resource stock to be sold at his reservation price. From the seller’s perspective, the buyer’s ability to develop a substitute is equivalent to an already available substitute with a higher marginal cost.
Original languageEnglish
Place of PublicationTilburg
PublisherEconomics
Number of pages19
Volume2013-014
Publication statusPublished - 2013

Publication series

NameCentER Discussion Paper
Volume2013-014

Keywords

  • exhaustible resource
  • substitute
  • innovation
  • closed-loop equilibrium

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