Empirical essays on the price formation in resource markets

The thesis at hand seeks to augment the understanding of price formation in resource markets. More specifically, the five essays that are part of the thesis are concerned with two research questions: i) Do players in resource markets behave strategically and, if so, how does their behaviour influence price formation? ii) How do different trade products of the same commodity influence each other's price formation? While the first four essays focus on the former research question, the final essay is concerned with the latter. Chapter 2 assesses the effects of a supply shock on the global natural gas market. By modelling gas supply as a spatial Cournot oligopoly, the paper investigates the vulnerability of different gas importing countries to price increases during a supply shock. It seeks to evaluate the countries' strategic positions during a crisis, which are mainly influenced by their access to gas infrastructure and resource endowment. Chapter 3 deals again with supply-side oligopolies. However, the paper presented here does not account only for one market but rather for two interacting markets. The research is motivated by the need for complementary inputs in steel production, namely iron ore and coking coal. Interestingly, some of the biggest mining companies play a major role in both markets. Therefore, we question the optimal business strategy for these oligopolists: Do they optimise the iron ore and the coking coal divisions on a firm or a division level? In contrast to the previous chapters, Chapter 5 presents an econometric analysis that uses a novel application of stochastic frontier analysis (SFA) to determine the exercise of market power in the iron ore market on a firm level. More specifically, the effect of macroeconomic variables and firm-specific characteristics on the individual firm's ability to drive prices above marginal costs measured by firm-specific Lerner indices is estimated. The focus of the thesis’ final chapter lies on the analysis of price formation in the international market for thermal coal. International trade of thermal coal, and in particular trade of derivatives, is still in its infancy compared to other commodity markets. We are interested in better understanding the process of price formation in such an environment. To this end, we analyse price formation in an intertemporal framework, i.e., the causal relationship between spot and futures prices, as well as an interregional context, i.e., between prices of two of the most important global trading hubs

Investigating the influence of firm characteristics on the ability to exercise market power : a stochastic frontier analysis approach with an application to the iron ore market

This paper empirically analyzes the existence of market power in the global iron ore market during the period 1993-2012 using an innovative Stochastic Frontier Analysis approach introduced by Kumbhakar et al. (2012). In contrast to traditional econometric procedures, this approach allows for the estimation of firm- and time-specific Lerner indices and, therefore, the assessment of the influence of individual firm characteristics on the ability to generate markups. We find that markups on average amount to 20%. Moreover, location and experience are identified to be the most important determinants of the magnitude of firm-specific markups

German Nuclear Policy Reconsidered: Implications for the Electricity Market

In the aftermath of the nuclear catastrophe in Fukushima, German nuclear policy has been reconsidered. This paper demonstrates the economic effects of an accelerated nuclear phase-out on the German electricity generation sector. A detailed optimization model for European electricity markets is used to analyze two scenarios with different lifetimes for nuclear plants (phase-out vs. prolongation). Based on political targets, both scenarios assume significant electricity demand reductions and a high share of generation from renewable energy sources in Germany. Our principal findings are: First, nuclear capacities are mainly replaced by longer lifetimes of existing coal-fired plants and the construction of new gas-fired plants. Second, fossil fuel-based generation and power imports increase, while power exports are reduced in response to the lower nuclear generation. Third, despite the increased fossil generation, challenging climate protection goals can still be achieved within the framework of the considered scenarios. Finally, system costs and electricity prices are clearly higher. We conclude that the generation sector can generally cope with an accelerated nuclear phase-out under the given assumptions. Yet, we emphasize that such a policy requires a substantial and costly transformation of the supply and the demand side.Nuclear policy; climate protection; renewable energy; electricity market modeling

Assessing market structures in resource markets - An empirical analysis of the market for metallurgical coal using various equilibrium models

The prevalent market structures found in many resource markets consist of high concentration on the supply side and low demand elasticity. Market results are therefore frequently assumed to be an outcome of strategic interaction between producers. Common models to investigate the market outcomes and underlying market structures are games representing competitive markets, strategic Cournot competition and Stackelberg structures that take into account a dominant player acting first followed by one or more players. We add to the literature by expanding the application of mathematical models and applying an Equilibrium Problem with Equilibrium Constraints (EPEC), which is used to model multi-leader-follower games, to a spatial market Using our model, we investigate the prevalent market setting in the international market for metallurgical coal between 2008 and 2010, whose market characteristics provide arguments for a wide variety of market structures. Using different statistical measures to compare model results with actual market outcomes, we find that two previously neglected settings perform best: First, a setting in which the four largest metallurgical coal exporting firms compete against each other as Stackelberg leaders, while the remainders act as Cournot followers. Second, a setting with BHPB acting as sole Stackelberg leader. (C) 2016 Published by Elsevier B.V

The global markets for coking coal and iron ore - Complementary goods, integrated mining companies and strategic behavior

The global market for coking coal is linked to the global market for iron ore since both goods are complementary inputs in pig iron production. Moreover, international trade of both commodities is highly concentrated, with only a few large companies active on both input markets. Given this setting, the paper presented investigates the strategy of quantity-setting (Cournot) mining companies that own both a coking coal and an iron ore division. Do these firms optimize the divisions' output on a firm level or by each division separately (division-by-division)? First, using a theoretical model of two Cournot duopolies of complementary goods, we find that there exists a critical capacity constraint below/above at which firm-level optimization results in identical/superior profits compared with division-level optimization. Second, by applying a spatial multi-input equilibrium simulation model of the coking coal and iron ore markets, we find that due to the limited capacity firms gain no (substantial) additional benefit from optimizing output on a firm level. (C) 2015 Published by Elsevier B.V

Supply Disruptions and Regional Price Effects in a Spatial Oligopoly-An Application to the Global Gas Market

Supply shocks in the global gas market may affect countries differently, as the market is regionally interlinked but not perfectly integrated. Additionally, high supply-side concentration may expose countries to market power in different ways. To evaluate the strategic position of importing countries with regard to gas supplies, we disentangle the import price into different components and characterize each component as price increasing or price decreasing. Because of the complexity of the interrelations in the global gas market, we use an equilibrium model programmed as a mixed complementarity problem (MCP) and simulate the blockage of liquefied natural gas (LNG) flows through the Strait of Hormuz. This enables us to account for the oligopolistic nature and the asymmetry of the gas supply. We find that Japan faces the most severe price increases, as the Japanese gas demand completely relies on LNG supply. In contrast, European countries such as the UK benefit from good interconnection to the continental pipeline system and domestic price taking production, both of which help to mitigate an increase in physical costs of supply as well as in the exercise of market power

Firm characteristics and the ability to exercise market power: empirical evidence from the iron ore market

This paper empirically analyzes the existence of market power in the global iron ore market during the period from 1993 to 2012. Using an innovative stochastic frontier analysis approach, we investigate the relationship between individual firm characteristics, macroeconomic conditions and the individual ability of firms to generate markups in the global iron ore market. Our findings indicate that the markups on average amount to 20%. Moreover, location of the main production site and experience measured in years of production are identified to be the most important determinants of the magnitude of firm-specific markups