This study investigates strategic behavior in nonrenewable resource markets by means of an experiment. Essential characteristics of nonrenewable resource markets are (a) the fact that long run production is limited by a private resource constraint and (b) the presence of competition from similar firms. From the firms’ perspective, the private resource constraint makes the problem dynamic, whereas the presence of other firms creates a possibility for strategic oligopoly behavior.
We experimentally examine the difference in behavior in three types of markets. In the first type of market, firms have enough resources left in order not to have to limit their production. In the second type of market, firms are somewhat constrained and in the third type of market the resource constraint is tightest. We hypothesize that the degree to which firms pay attention to either of the two aspects of the market is a function of the abundance of the resource. In particular, we hypothesize that strategic response behavior -where firms condition their production on the production of others- will be found more often in markets where usage of the resource is relatively unconstrained.
Joint work with Joep Sonnemans