NDLI: Imperfect Cartelization in OPEC

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Imperfect Cartelization in OPEC

Content Provider	Scilit
Author	Okullo, Samuel Jovan
Copyright Year	2016
Description	Journal: SSRN Electronic Journal 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.
Related Links	https://pure.uvt.nl/ws/files/10566815/2016_011.pdf https://papers.ssrn.com/sol3/Delivery.cfm?abstractid=2749573
ISSN	10914358
e-ISSN	15565068
DOI	10.2139/ssrn.2749573
Journal	SSRN Electronic Journal
Language	English
Publisher	Elsevier BV
Publisher Date	2016-03-21
Access Restriction	Open
Subject Keyword	Journal: SSRN Electronic Journal Environmental Studies Imperfect Cartels Nash Bargaining Collusion Strategies
Content Type	Text
Resource Type	Article
Subject	Public Health, Environmental and Occupational Health Psychiatry and Mental Health

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