On monopoly power in extractive resource markets

Potential monopoly power in extractive resource markets is reduced by the depletability of reserves. This paper examines the dependence of monopoly power on resource rent, and on uncertainty over future reserve levels. A model is developed that treats reserves as “inventories” that fluctuate stochastically over time as a result of exploration, development, and production activities. Solutions of the model illustrate how output and monopoly power vary with the elasticity of demand, rent as a fraction of price, and the variance of reserve fluctuations. It is shown that uncertainty over future reserves can speed up production and by reducing resource rent, restore part of the monopoly power otherwise lost because of depletion. Antitrust implications are discussed, with reference to several resources.