Cartel Deception in Nonrenewable Resource Markets

Tracy Lewis and Richard Schmalensee

Bell Journal of Economics, 1982, vol. 13, issue 1, 263-271

Abstract: Salant's (1976) model of cartelized resource markets with competitive fringe producers predicts an evolution of prices that lies between the Hotelling predictions for monopoly and competition. The price trajectory Salant derives is the best the cartel can enforce against competitive behavior. Suppose cartel output cannot be observed and futures contracts do not commit all reserves available. If other sellers expect price to follow the Salant path, the cartel can exploit those expectations by covertly producing either more or less than its Salant equilibrium output. Thus the Salant price trajectory is not a plausible equilibrium when cartel output is unobservable, and the use of Salant-type models to analyze real markets may be misleading.

Date: 1982
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