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Too many or too few? On the optimal number of firms in the commons

Author

Listed:
  • Luca Colombo

    (ESC [Rennes] - ESC Rennes School of Business)

  • Paola Labrecciosa

    (ESSCA - ESSCA – École supérieure des sciences commerciales d'Angers = ESSCA Business School)

  • Leo Simon

    (UC Berkeley - University of California [Berkeley] - UC - University of California, ESSCA - ESSCA – École supérieure des sciences commerciales d'Angers = ESSCA Business School)

Abstract

In this paper, we consider common-pool non-renewable resource industries and study the socially optimal industry size. Our analysis is conducted in terms of an infinite-horizon differential game (with either open-loop or feedback strategies). We derive two main results. First, we show that there exists a unique state-independent efficiency-inducing industry size, ranging between 1 and infinity, if and only if the elasticity of the price-cost margin (capturing static market power) and the elasticity of the difference between social and private resource rents (capturing the tragedy of the commons) are the same. Second, allowing for entry/exit, we show that the regulator can set a license fee to be paid by firms to get access to the resource such that the endogenous number of firms in the equilibrium with regulated entry is socially optimal.

Suggested Citation

  • Luca Colombo & Paola Labrecciosa & Leo Simon, 2023. "Too many or too few? On the optimal number of firms in the commons," Post-Print hal-04207035, HAL.
    • Handle: RePEc:hal:journl:hal-04207035
    DOI: 10.1016/j.jeem.2023.102825
    as

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    References listed on IDEAS

    as
    1. repec:bla:econom:v:53:y:1986:i:212:p:519-27 is not listed on IDEAS
    2. Karp, Larry, 1992. "Social Welfare in a Common Property Oligopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(2), pages 353-372, May.
    3. Reinganum, Jennifer F & Stokey, Nancy L, 1985. "Oligopoly Extraction of a Common Property Natural Resource: The Importance of the Period of Commitment in Dynamic Games," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(1), pages 161-173, February.
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    More about this item

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • Q30 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - General

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