Imperfect cartelization in OPEC

Samuel Okullo () and Frédéric Reynès ()

Energy Economics, 2016, vol. 60, issue C, 333-344

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 be sustained 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.

Keywords: Imperfect cartels; Oil; OPEC; Nash bargaining; Collusion strategies (search for similar items in EconPapers)
JEL-codes: C61 C7 L13 L22 L71 Q31 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:60:y:2016:i:c:p:333-344

DOI: 10.1016/j.eneco.2016.10.010

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