chapter  4
15 Pages

THE BACKSTOP AND OLIGOPOLY

Clearly with quality declining as the stock is depleted, marginal revenue net of marginal cost rises at a rate less than r.

Hotelling [43] pointed out that for the case of the demand schedule linear in price, the monopolist would take longer to extract the same stock as would a planner or the competitive industry analogue. Examples worked out in Hartwick and Olewiler [36, Chapters 3 and 4] indicate that the extraction time of the com­ petitors would be half that of the monopolist for a given deposit. Hotelling suggested that the monopolist was the “friend of the conservationist” . However this result turns on the linearity of demand. For the case of demand with constant elasticity and zero costs of extraction

p ( t ) _ MR(t) p ( t ) ~M R ( t )

or the monopolist and the competitive industry would extract at the same rate (Sweeney [93] and Stiglitz [91]. See also Lewis, Mat­ thews, Burness [60] for other cases.)

4. THE BACKSTOP AND OLIGOPOLY

Introduction

We observed that exhaustible stock of type i could be replaced by a substitute stock of type j, oil by coal for example. The ideal substitute can be produced at constant cost indefinitely, oil by say

fusion power at some future date. Such a constant cost substitute has come to be known as the backstop supply source. Here we consider how different ownership arrangements for the backstop affect current extraction of the exhausting stock. Suppose oil producers developed fusion power and stood ready to implement the backstop. What is a welfare maximizing implementation scheme? We touch on these sorts of issues below. Games between current stock owners and backstop developers can arise.