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OPEC's crude game: The supply curve in a dynamic, strategic environment

Hvinden, Even Comfort
Working paper
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URI
http://hdl.handle.net/11250/2630791
Date
2019-11
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  • Centre for Applied Macro- and Petroleum economics (CAMP) [98]
Abstract
The market behavior nationalized oil companies in the Organization of Petroleum Exporting Countries (OPEC) is starkly time-varying. I rationalize OPEC's behavior in an infinitely repeated game of Cournot competition with imperfect monitoring, capacity constraints to output, and demand evolving as a Markov chain. I adapt the methodology of Abreu, Pearce, and Stacchetti (1990) to derive optimal symmetric equilibria. High powered incentives are created by the threat of output wars, the severity of which is endogenously determined by current and future expected market conditions. Implied price elasticities of supply increase in magnitude and may change sign under constrained incentive creation. The key empirical implication is that unanticipated changes to OPEC's strategic environment will persistently alter their behavior and create breaks in the joint stochastic distribution of equilibrium prices and quantities.
Publisher
BI Norwegian Business School
Series
CAMP Working Paper Series;10/2019

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