Market Structure and Resource Extraction Under Uncertainty

This paper compares the rate of extraction of a natural resource under alternative market structures when there is uncertainty about the date of discovery of a substitute (or about the date of discovery of a new deposit). The analysis shows that imperfectly competitive market structures are excessively conservationist: for any value of the initial stock of the natural resource, the price is higher than in competitive equilibrium (and therefore higher than the socially optimal level). But markets with limited competition may have a higher price than markets with pure monopoly (the same monopolist controlling the natural resource and its substitute). In particular, we find that the highest prices are associated with (Nash quantity setting) duopolists; the next highest prices occur in markets in which the monopolist controls the resource but the substitute is competitively produced; the pure monopolist sets his price lower than this, while the market in which a monopolist controls the substitute but the resource is competitvely owned is still lower.