Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/252102 
Year of Publication: 
2022
Series/Report no.: 
CESifo Working Paper No. 9585
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
Inspired by empirical evidence from the oil market, we build a model of an oligopoly facing a fringe as well as competition from renewable resources. We explore different subclasses of HARA utility functions (Cobb-Douglas, power and quadratic utility) to check the robustness of results found in the previous literature. For isoelastic demand, we characterize the equilibrium extraction rates of the fringe and the oligopolists. There always exists a phase of simultaneous supply of the oligopolists and the fringe, implying an inefficient order of use of resources since the oligopolists have smaller unit extraction costs and carbon emissions than the fringe. We calibrate our model to the oil market to quantify this sequence effect. In our benchmark calibration, we find for the three HARA subclasses that the sequence effect is responsible for almost all of the welfare loss compared to the first-best. It becomes smaller as market power decreases. Furthermore, we show that climate damage and Green Paradox effects depend non-monotonically on the degree of market power.
Subjects: 
oligopoly-fringe
climate policy
non-renewable resource
Herfindahl rule
limit pricing
oligopoly
HARA preferences
JEL: 
Q31
Q42
Q54
Q58
Document Type: 
Working Paper
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