A dominant firm in an exhaustible resource industry : the case of nickel

Abstract

The purpose of the dissertation is to develop a general model of an exhaustible natural resource industry dominated by a single firm which is confronted with potential entry and expansion from a group of smaller firms. The small firms have capacity constraints and a limited ability to expand capacity in any one time period. The model is used to determine the optimal pricing policy of the dominant firm over time and the effect of this policy on the entry and production decisions of the fringe firms. The main conclusion of the dissertation is that under sufficiently binding constraints on the ability of the fringe firms to increase capacity quickly the dominant firm will lose its market share over time and the industry will eventually become competitive. The world nickel market provides for an interesting case study and empirical test of the model. It may well be the best example in the natural resource area of the dominant firm-price leadership model as characterized by economists. The International Nickel Company has been a strong force in this market for most of the twentieth century. Additionally, it is a natural resource industry which, if viewed at different points in time, could be described as being monopolistic, controlled by a dominant firm, and, more recently, as competitive. An important area of investigation is to determine the forces that led initially to monopoly and later resulted in entry, creating these extreme changes in market structure.