The Cartel-Fringe Equilibrium with Sluggish Demand

The demand for some products, such as energy, does not instantaneously respond to price changes. In fact, sluggishness of the demand is an important characteristic of energy and oil markets. This study examines the effect of demand sluggishness on the price and output of a fossil fuel industry in which a cartel and a fringe firm supply in the market. The cartel has larger reserves and less costly extraction compared to what the fringe encounters. The strategic interactions between suppliers is characterized as a dynamic Stackelberg model, and the results demonstrate that supply and exploration investment increase with the sluggishness of the demand. Furthermore, it is shown that by the increase of interest rate, firms become myopic and their reserves and long-run supply decrease. On the contrary, reserves and long-run supply increase with the market size, leading to decreasing prices.