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Imperfect Cartelization in OPEC

Okullo,Samuel
; 
Reynes,F.
Abstract
A model of global oil production is applied to study cartelization by OPEC countries. Writing out the shadow price on quota allocations so as to draw correspondence to coefficients of cooperation (Cyert et al. 1973), we examine the incentives that different OPEC members to collude. We find that heterogeneity in OPEC and the supplies of the non-OPEC fringe create strong incentives against OPEC cooperation. OPEC’s optimal 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 contrary to predictions of the standard cartel model that such producers should be allocated relatively more stringent quotas. Furthermore, we find that cartel collusion is likely to be sustained for elastic than 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 OPECs ability to raise long-run global oil prices.
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Date
2016-03-21
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Publisher
CentER, Center for Economic Research
Collections
Tilburg University Research Output Collection
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Keywords
imperfect cartels, oil, OPEC, Nash bargaining, cullusion 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 & Reynes, F 2016 'Imperfect Cartelization in OPEC' CentER Discussion Paper, vol. 2016-011, CentER, Center for Economic Research, Tilburg.
URI
https://hdl.handle.net/20.500.14602/29790
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info:eu-repo/semantics/restrictedAccess
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