Embargoes and Supply Shocks in a Market With a Dominant Seller

S. Rao Aiyagari; Raymond G. Riezman

doi:10.4324/9781315657981-2

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Book chapter

Embargoes and Supply Shocks in a Market With a Dominant Seller

S. Rao Aiyagari and Raymond G. Riezman

Energy, Foresight and Strategy, pp.14-40

Resources for the Future

1985

DOI: 10.4324/9781315657981-2

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Abstract

This chapter uses dynamic game theory and rational expectations to analyze the nature and effects of supply shocks in oil markets. Research in applying rational expectations methodology in dynamic macroeconomics has emphasized the importance of going beyond postulating demand and supply curves to analyzing the agents' optimization problems (see, for example, Sargent, 1982). Traditional macroeconomics has often proceeded by drawing demand and supply curves for various sectors of the macroeconomy with dynamic elements introduced by including lagged variables. Dynamic elements have been viewed as arising from adjustment costs, lags in decision making, and most importantly from expectations of agents regarding future values of variables. Agents are assumed to form their expectation by using various schemes based on past observations. Analysts applied these models empirically by regarding the parameters of these dynamic demand and supply curves as "structural" (in the sense of being invariant to alternative policy rules of government or, in the present context, OPEC) and using the estimated parameter values for analyzing the effects of different policies. Implicit in this procedure is the assumption that the parameters in the expectation formation schemes of agents are also "structural."

Competitive Fringe

Fringe Suppliers

Long Run Demand Curves

Long Run Demand

Stochastic Euler Equation

Policy Invariant Parameters

Adjustment Cost Parameter

Rational Expectations

Constant Unit Cost

Fringe Supply

Supply Curves

Alternative Policy Rules

Linear Quadratic Optimization Problem

Embargo Policy

Dynamic Game Theory

Dominant Player

Adjustment Costs

Supply Shock

Dominant Seller

Optimal Price Policy

Traditional Macroeconomics

Buyer's Expectations

Estimating Time Series Models

Expectation Formation Schemes

Lagged Oil Price

Details

Title: Subtitle: Embargoes and Supply Shocks in a Market With a Dominant Seller
Creators: S. Rao Aiyagari
Raymond G. Riezman
Contributors: Thomas J. Sargent (Editor)
Resource Type: Book chapter
Publication Details: Energy, Foresight and Strategy, pp.14-40
DOI: 10.4324/9781315657981-2
Publisher: Resources for the Future; Washington, D.C.
Alternative title: Embargoes and Supply Shocks in a Market with a Dominant Seller
Language: English
Date published: 1985
Academic Unit: Economics
Record Identifier: 9984963187602771

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