Strategic Resource Dependence and Adoption of a Substitute under Learning-by-Doing

There is ample evidence that the production of alternative sources of energy is subject to learning-by-doing. The present paper examines the implications of learning-by-doing in the bilateral resource monopoly studied by Gerlagh and Liski (2011). We derive the socially optimal use of both oil and the substitute, as well as the Markov-perfect equilibrium. Our results are qualitatively different from those of Gerlagh and Liski. We show that it may be socially efficient to discard part of the cheap oil stock. Interestingly, we find that, in the Markov-perfect equilibrium, the buyer curbs his consumption to conserve the oil stock owned by the seller.