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Modeling Strategic Investment Decisions in Spatial Markets

Author

Listed:
  • Lorenczik, Stefan

    (Energiewirtschaftliches Institut an der Universitaet zu Koeln)

  • Malischek, Raimund

    (Energiewirtschaftliches Institut an der Universitaet zu Koeln)

  • Trüby, Johannes

    (Energiewirtschaftliches Institut an der Universitaet zu Koeln)

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 programing models. The models comprise an investment period and a supply period in which players compete in quantities. We compare three models, one perfect competition and two Cournot models, in which the product is either traded through long-term contracts or on spot markets in the supply period. 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. The total welfare differs only negligibly.

Suggested Citation

  • Lorenczik, Stefan & Malischek, Raimund & Trüby, Johannes, 2014. "Modeling Strategic Investment Decisions in Spatial Markets," EWI Working Papers 2014-9, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI).
    • Handle: RePEc:ris:ewikln:2014_009
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    References listed on IDEAS

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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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