Market Power and Shadow Prices for Nonrenewable Resources: An Empirical Dynamic Model

Posted by D. Daniel Sokol

C.-Y. Cynthia Lin Department of Agricultural and Resource Economics, UC Davis and Wei Zhang Department of Agricultural and Resource Economics, UC Davis explores Market Power and Shadow Prices for Nonrenewable Resources: An Empirical Dynamic Model.

ABSTRACT: This paper estimates a dynamic model of the world market for nine nonrenewable resources over the period 1970-2004, and tests whether the countries supplying a nonrenewable resource behaved as price-takers or oligopolists. The model generates estimates of the shadow price of the nine minerals with minimal functional form assumptions. The results show that the countries supplying hard coal, lead, and oil behaved as oligopolists during the study period, while the world market for other nonrenewable resources could be characterized as perfectly competitive. The shadow prices do not increase monotonically, which is evidence for stock effects in extraction costs. The shadow prices of most minerals peaked between 1970 and 1980.