Mothballing in a duopoly: Evidence from a (Shale) oil market
Comincioli,Nicola Hagspiel,Verena Kort,Peter M. Menoncin,Francesco Miniaci,Raffaele Vergalli,Sergio
Comincioli,Nicola
Hagspiel,Verena
Kort,Peter M.
Menoncin,Francesco
Miniaci,Raffaele
Vergalli,Sergio
Abstract
The mothballing option has been studied in the literature, but mainly in decision theoretic frameworks. This paper looks at it from a strategic point of view and applies it to an incumbent-entrant framework. In particular, based on the recent strategic interactions between OPEC and the shale oil industry, we conduct a case study where the incumbent OPEC is a flexible producer that competes with a representative shale oil firm. Upon entry, the latter produces a fixed amount but it can apply the mothballing option in times of low demand. Our main results are threefold. First, we find that under low demand uncertainty, the mothballing option has a negative effect on the value of the entrant. Second, a large market share of the entrant will stimulate mothballing, caused by a so-called squeeze strategy of the incumbent. Third, we show that a higher demand elasticity induces mothballing as confirmed in our empirical analysis of the (shale) oil market.
Description
Publisher Copyright: © 2021 Elsevier B.V.
Date
2021-12
Journal Title
Journal ISSN
Volume Title
Publisher
Research Projects
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Journal Issue
Keywords
Crude oil, Mothballing, OPEC, Output game, Shale oil
Citation
Comincioli, N, Hagspiel, V, Kort, P M, Menoncin, F, Miniaci, R & Vergalli, S 2021, 'Mothballing in a duopoly : Evidence from a (Shale) oil market', Energy Economics, vol. 104, 105583. https://doi.org/10.1016/j.eneco.2021.105583