Managing an oligopoly of would-be sovereigns: the dynamics of joint control and self-control in the international oil industry past, present, and future

Theodore Moran

International Organization, 1987, vol. 41, issue 4, 575-607

Abstract: The key to the success of the oil oligopoly has been the ability of its members to make commitments to each other credible despite great divisiveness and enormous uncertainties. To accomplish this, the oil companies constructed a regime of suprasovereign constraints to control the pursuit of individual self-interest. When these anti-democratic, anti-autonomous institutions functioned effectively, the corporations met challenges far greater than those OPEC subsequently faced; when they began to disintegrate, the companies' ability to hold price above marginal cost deteriorated. OPEC reinvigorated the oligopoly using the ready-made self-denial and surveillance mechanisms built by the companies, then systematically unravelled them in moving towards a “mature” cartel held together by “mere” common interest, promises, and threats. To reconstruct an oligopoly that has the cohesiveness of the corporate era, OPEC will need not only a more moderate price trajectory, but also a binding structure that gives preponderance to the most conservative members, provides prompt and accurate verification of cheating, and automatically imposes penalties in magnified form for competitive behavior (without the need for direct retaliation). Beyond predictions about the future of the oil industry, these findings have important implications for economic approaches to imperfect competition, for anti-trust analyses of collusion, and for organizational theories of hegemonic leadership.

Date: 1987
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