Mixed Oligopoly Model with Foreign Private Firms in Exhaustible Resource Industry

In this work, mixed oligopoly model with foreign private firms in exhaustible resource industry is analyzed. To the best of my knowledge, this is the first attempt to construct and analyze the model of the mentioned structure. A two-stage dynamic game is proposed, where two firms with high degree of market power are competing with respect to quantities. In the first stage, the government determines the optimal rate of privatization and afterwards, both firms select the extraction paths for the current and future periods. It is shown that the increase in degree of foreign penetration leads to the redistribution of extraction from the future period to the current one for the state-owned firm, while the opposite is true for the private firm. Total output changes in the same direction as the state-owned firm’s output. The optimal level of privatization is derived, and it is shown that full privatization might be optimal in case of the large cost gap between the state-owned and the private firm and given the low degree of foreign penetration. Otherwise, it is optimal for the government to reduce privatization level, with the increase in the degree of foreign penetration. Full nationalization can never be optimal under the framework of the examined model.