On the exhaustible-resource monopsony

The exhaustible-resource monopsony problem provides a basis for understanding the dynamic relationship between resource importers and suppliers. We find that the mere presence of a substitute supply creates a time-inconsistency problem for the monopsonist. When the buyer can commit to delaying the arrival of the substitute, he obtains a substantial reduction in resource prices but not enough as to appropriate the entire resource rent. In the absence of commitment, the equilibrium exhibits Coasian dynamics with sellers typically capturing a larger share of the rent; paradoxically, however, the sellers’ surplus vanishes when the price of the substitute approaches infinity. The notion of the substitute can be mapped into the well-known connection between the durable-good monopoly and the exhaustibleresource monopsony. JEL Classification: D42; L12; Q30.