Temporary natural resource cartels

We analyze the behavior of a nonrenewable resource cartel that anticipates being forced, at some date in the future, to break up into an oligopolistic market in which its members will then have to compete as rivals. Under reasonable assumptions about the value function of the individual firms in the oligopolistic equilibrium that follows the breakup, we show that the cartel will then produce more over the same interval of time than it would if there were no threat of dissolution, and that its rate of extraction is a decreasing function of the cartel's life; that there are circumstances under which the cartel will attach a negative marginal value to the resource stocks, in which case the rate of depletion will be increasing over time during the cartel phase; that, for a given date of dissolution, the equilibrium stocks allocated to the post-cartel phase will increase as a function of the total initial stocks, whereas those allocated to the cartel phase will increase at first, but begin decreasing beyond some level of the total initial stocks. (c) 2006 Elsevier Inc. All rights reserved.