EXPLORATION AND EXTRACTION IN A DUOPOLY-EXHAUSTIBLE RESOURCE MARKET

Exploration for an exhaustible natural resource is valuable because it produces information about the resource stock. I model a duopoly-exha ustible resource industry with imperfect information about stock size as a two-period game, where each period is made up of an exploration s tage and an extraction stage. I derive the value of gaining informatio n about stock size prior to committing to an extraction plan both for the exploring firm and for the rival. I show that an exploring firm wo uld prefer, on average, to keep exploration information private, but t hat industry profit is higher when information is made public.