Optimal drilling efforts and industry structure

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Abstract

We consider a resource extraction model with the possibility of extending the resource stock by drilling efforts and an oligopolistic competition of symmetric firms. Assuming a hyperbolic market demand, we adopt the open-loop Nash equilibrium to analyze and compare the outcomes of a private vs a common resource pool. For both cases, the drilling efforts of the individual firms strongly depend on the market structure. For a low competition, the efforts increase the number of firms, and the opposite is true for a high competition. On the other hand, aggregate drilling efforts are different among the two types of pools and are opposite to Schumpeterian’s hypothesis (i.e., they are either an inverted U-shaped (private pools) or strictly increasing (single pools)).

Keywords

nonrenewable resources / drilling / cournot nash equilibrium / differential games / oligopoly

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