Imperfect cartelization in OPEC
Okullo,Samuel J. Reynes,Frederic
Okullo,Samuel J.
Reynes,Frederic
Abstract
A model of global oil production is applied to study cartelization by OPEC countries. We define a measure for the degree of cooperation, analogous to the market conduct parameter of Cyert et al. (1973), Geroski et al. (1987), Lofaro (1999), and Symeonidis (2000). This parameter is used to assess the incentives of different OPEC members to collude. We find that heterogeneity in OPEC and the supplies of the non-OPEC fringe create strong incentives against collusion. More specifically, OPEC's supply strategy, although observed to be substantially more restrictive than that of a Cournot-Nash oligopoly, is found to still be more accommodative than that of a perfect cartel. The strategy involves allocating larger than proportionate quotas to smaller and relatively costlier producers, as if to bribe their participation in the cartel. This is in contrast to predictions of the standard cartel model that such producers should be allocated relatively more stringent quotas. Furthermore, we demonstrate that cartel collusion is more likely to besustained for elastic than for inelastic demand. Since global oil demand is well known to be inelastic, this observation provides another structural explanation for why OPEC behavior is inconsistent with that of a perfect cartel. Our study points to multiple headwinds that limit OPEC's ability to mark up the oil price. (C) 2016 Elsevier B.V. All rights reserved.
Description
Date
2016-11
Journal Title
Journal ISSN
Volume Title
Publisher
Research Projects
Organizational Units
Journal Issue
Keywords
Imperfect cartels, Oil, OPEC, Nash bargaining, Collusion strategies, C61 - Optimization Techniques ; Programming Models ; Dynamic Analysis, C7 - Game Theory and Bargaining Theory, L13 - Oligopoly and Other Imperfect Markets, L22 - Firm Organization and Market Structure, L71 - Mining, Extraction, and Refining: Hydrocarbon Fuels, Q31 - Demand and Supply ; Prices, SDG 16 - Peace, Justice and Strong Institutions
Citation
Okullo, S J & Reynes, F 2016, 'Imperfect cartelization in OPEC', Energy Economics, vol. 60, pp. 333-344. https://doi.org/10.1016/j.eneco.2016.10.010