Learning and price volatility in duopoly models of resource depletion

The aim of this paper is to provide a theoretical model that can account for price fluctuations in depletable resource markets. We do so by introducing learning into a Hotelling-style duopoly model of optimal resource depletion. Before the depletable resource becomes scarce, the self-confirming equilibrium of the model mirrors noncooperative rational expectations equilibrium in that supply is high and price is low, although learning does induce occasional upward price spikes that are followed by a long period of falling price. Once the depletable resource becomes scarce the dynamics of the market change significantly, with the self-confirming equilibrium mirroring the cooperative rather than noncooperative rational expectations equilibrium. Supply is low and price is high. Price spikes still occur but against a background of increasing prices. When scarcity is sufficient then the market is permanently in a self-confirming equilibrium that is equivalent to cooperative rational expectations equilibrium. ∗We thank participants at the European Summer Symposium in Macroeconomics (Izmir 2007) for helpful comments and suggestions.