Exhaustible Resource Extraction as a Dynamic Game


We study the strategic interaction in the extraction of exhaustible resources. The Hotelling rule gives the optimal extraction choice for a monopolist owner of an exhaustible resource, but we extend that to consider the dynamic game played by multiple agents with a finite supply of the exhaustible resource. We then apply this to the world oil market to understand the importance of collusion among OPEC members by solving the model when they act collusively (as one agent) versus compete with one another. This also illustrates many new computational techniques for solving discrete state, continuous time dynamic games, including homotopy continuation in the presence of multiple equilibria.