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The Hotelling Model with Multiple Demands

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  • Gérard GAUDET
  • Stephen W. SALANT

Abstract

The purpose of this chapter is to provide an elementary introduction to the nonrenewable resource model with multiple demand curves. The theoretical literature following Hotelling (1931) assumed that all energy needs are satisfied by one type of resource (e.g. "oil"), extractible at different per-unit costs. This formulation implicitly assumes that all users are the same distance from each resource pool, that all users are subject to the same regulations, and that motorist users can switch as easily from liquid fossil fuels to coal as electric utilities can. These assumptions imply, as Herfindahl (1967) showed, that in competitive equilibrium all users will exhaust a lower cost resource completely before beginning to extract a higher cost resource: simultaneous extraction of different grades of oil or of oil and coal should never occur. In trying to apply the single-demand curve model during the last twenty years, several teams of authors have independently found a need to generalize it to account for users differing in their (1) location, (2) regulatory environment, or (3) resource needs. Each research team found that Her ndahl's strong, unrealistic conclusion disappears in the generalized model, in its place, a weaker Herfindahl result emerges. Since each research team focussed on a different application, however, it has not always been clear that everyone has been describing the same generalized model. Our goal is to integrate the findings of these teams and to exposit the generalized model in a form which is easily accessible.

Suggested Citation

  • Gérard GAUDET & Stephen W. SALANT, 2014. "The Hotelling Model with Multiple Demands," Cahiers de recherche 08-2014, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  • Handle: RePEc:mtl:montec:08-2014
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    Cited by:

    1. Renaud Coulomb & Oskar Lecuyer & Adrien Vogt-Schilb, 2019. "Optimal Transition from Coal to Gas and Renewable Power Under Capacity Constraints and Adjustment Costs," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 73(2), pages 557-590, June.
    2. Malik Curuk & Suphi Sen, 2015. "Oil Trade and Climate Policy," CESifo Working Paper Series 5285, CESifo.

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