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Modeling strategic investment decisions in spatial markets

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  • Lorenczik, Stefan
  • Malischek, Raimund
  • Trüby, Johannes

Abstract

Markets for natural resources and commodities are often oligopolistic. In these markets, production capacities are key for strategic interaction between the oligopolists. We analyze how different market structures influence oligopolistic capacity investments and thereby affect supply, prices and rents in spatial natural resource markets using mathematical programming models. The models comprise an investment stage and a supply stage in which players compete in quantities. We compare three models, a perfect competition and two Cournot models, in which the product is either traded through long-term contracts or on spot markets in the supply stage. Tractability and practicality of the approach are demonstrated in an application to the international metallurgical coal market. Results may vary substantially between the different models. The metallurgical coal market has recently made progress in moving away from long-term contracts and more towards spot market-based trade. Based on our results, we conclude that this regime switch is likely to raise consumer rents but lower producer rents, while the effect on total welfare is negligible.

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  • Lorenczik, Stefan & Malischek, Raimund & Trüby, Johannes, 2017. "Modeling strategic investment decisions in spatial markets," European Journal of Operational Research, Elsevier, vol. 256(2), pages 605-618.
    • Handle: RePEc:eee:ejores:v:256:y:2017:i:2:p:605-618
    DOI: 10.1016/j.ejor.2016.06.047
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    More about this item

    Keywords

    Spatial natural resource markets; Capacity investment; Oligopoly; Equilibrium Problem with Equilibrium Constraints (EPEC); Coal;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L72 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Mining, Extraction, and Refining: Other Nonrenewable Resources

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