The Hotelling model under uncertainty

Abstract

The classical Hotelling model was traditionally applied to a static world with perfect certainty. The present note, on the contrary, examines the effects of random changes in the parameters of the Hotelling model on the optimal decisions regarding the depletion of an exhaustible resource. Under the assumption of risk neutrality of the mining firm, we have found that precautionary motives work not only with respect to the randomness of the reserves, which were shown in previous studies, but also with respect to all other parameters that are involved in the determination of the equilibrium path of prices.