Endogenous Shifts in OPEC Market Power: A Stackelberg Oligopoly with Fringe

Daniel Huppmann

No 1313, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: This article proposes a two-stage oligopoly model for the crude oil market. In a game of several Stackelberg leaders, market power increases endogenously as the spare capacity of the competitive fringe goes down. This effect is due to the specific cost function characteristics of extractive industries. The model captures the increase of OPEC market power before the financial crisis and its drastic reduction in the subsequent turmoil at the onset of the global recession. The two-stage model better replicates the price path over the years 2003-2011 compared to a standard simultaneous-move, onestage Nash-Cournot model with a fringe. This article also discusses how most large-scale numerical equilibrium models, widely applied in the energy sector, over-simplify and potentially misinterpret market power exertion.

Keywords: crude oil; OPEC; oligopoly; Stackelberg market; market power; consistent conjectural variations; equilibrium model (search for similar items in EconPapers)
JEL-codes: C61 C72 L71 (search for similar items in EconPapers)
Pages: 26 p.
Date: 2013
New Economics Papers: this item is included in nep-com and nep-ene
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Citations: View citations in EconPapers (19)

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Working Paper: Endogenous shifts in OPEC market power - A Stackelberg oligopoly with fringe (2013)
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