External Publications
2021 .19
Date: 07/10/2021

Mothballing in a Duopoly: Evidence from a (Shale) Oil Market


Authors:

Nicola Comincioli (University of Brescia, Fondazione Eni Enrico Mattei); Verena Hagspiel (Norwegian University of Science and Technology); Peter M. Kort (Tilburg University, University of Antwerp); Francesco Menoncin (University of Brescia); Raffaele Miniaci (University of Brescia); Sergio Vergalli (University of Brescia, Fondazione Eni Enrico Mattei)

Type: Journal
Published in: Energy Economics, online 7 October 2021, 105583

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.

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Mothballing in a Duopoly: Evidence from a (Shale) Oil Market

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