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Pricing Policies of an Oil Cartel with Expectation of Substitute Producers

Abstract:
The proposition that the net price in a competitive market and the net marginal revenue in a monopolistic market rise at the rate of interest was first demonstrated by Hotelling (1931) for a non-durable exhaustible resource. However, Levhari and Liviatan (1977) and Fisher (1981) have shown that Hotelling's r-percent rule is not valid when extraction costs rise with cumulative production. This r-percent rule also applies to a perfectly durable resource when the resource is produced in a competitive market. It does not apply in the case of a monopolistic market.

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Energy Specializations: Petroleum – Markets and Prices for Crude Oil and Products; Energy Security and Geopolitics – Geopolitics of Energy

JEL Codes:
L13 - Oligopoly and Other Imperfect Markets
Q48 - Energy: Government Policy

Keywords: Oil cartel, Pricing policy, Hotelling, Monopolistic market, Competition

DOI: 10.5547/ISSN0195-6574-EJ-Vol9-No1-10


Published in Volume 9, Number 1 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.