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Disagreement in bargaining: An empirical analysis of OPEC

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  • Hyndman, Kyle

Abstract

We consider a stylised model in which two cartel members bargain over the aggregate-production quota in a world of asymmetric information. We show that when the two cartel members are sufficiently different, the probability of agreement depends on both the current state of demand and initial production. Specifically, the probability of agreement is much lower when demand is low (and initial production is relatively high) than when demand is high (and initial production is relatively low). We also find that, regardless of the current demand state, the more extreme is initial production, the higher is the probability of agreement. Using an event study, where we take as events OPEC production quota announcements, we demonstrate empirically that the predictions of the model are borne out.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 26 (2008)
Issue (Month): 3 (May)
Pages: 811-828

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Handle: RePEc:eee:indorg:v:26:y:2008:i:3:p:811-828

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Web page: http://www.elsevier.com/locate/inca/505551

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References

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  1. Kyle Bagwell, 2004. "Collusion and Price Rigidity," Theory workshop papers 658612000000000081, UCLA Department of Economics.
  2. Staiger, R.W. & Wolak, F.A., 1990. "Collusive Pricing With Capacity Constraints In The Presence Of Demand Uncertainty," Working Papers e-90-14a, Hoover Institution, Stanford University.
  3. Ray, D. & Vohra, R., 1993. "Equilibrium Binding Agreements," Papers 21, Boston University - Department of Economics.
  4. Cramton, Peter C. & Palfrey, Thomas R., 1990. "Ratifiable Mechanisms: Learning from Disagreement," Working Papers 731, California Institute of Technology, Division of the Humanities and Social Sciences.
  5. Susan Athey & Kyle Bagwell & Chris Sanchirico, 2004. "Collusion and Price Rigidity," Review of Economic Studies, Oxford University Press, vol. 71(2), pages 317-349.
  6. Robert K. Kaufmann, Stephane Dees, Pavlos Karadeloglou and Marcelo Sanchez, 2004. "Does OPEC Matter? An Econometric Analysis of Oil Prices," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 67-90.
  7. Margaret C. Levenstein & Valerie Y. Suslow, 2002. "What Determines Cartel Success?," UMASS Amherst Economics Working Papers 2002-01, University of Massachusetts Amherst, Department of Economics.
  8. Peter Cramton & Thomas R. Palfrey, 1991. "Cartel Enforcement with Uncertainty About Costs," Papers of Peter Cramton 90ier, University of Maryland, Department of Economics - Peter Cramton, revised 09 Jun 1998.
  9. Rotemberg, Julio J & Saloner, Garth, 1986. "A Supergame-Theoretic Model of Price Wars during Booms," American Economic Review, American Economic Association, vol. 76(3), pages 390-407, June.
  10. Seidmann, Daniel J & Winter, Eyal, 1998. "A Theory of Gradual Coalition Formation," Review of Economic Studies, Wiley Blackwell, vol. 65(4), pages 793-815, October.
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Citations

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Cited by:
  1. Wirl, Franz, 2010. "Dynamic demand and noncompetitive intertemporal output adjustments," International Journal of Industrial Organization, Elsevier, vol. 28(3), pages 220-229, May.
  2. Kyle Hyndman, 2011. "Repeated bargaining with reference-dependent preferences," International Journal of Game Theory, Springer, vol. 40(3), pages 527-549, August.
  3. Aune, Finn Roar & Mohn, Klaus & Osmundsen, Petter & Rosendahl, Knut Einar, 2009. "Financial market pressures, tacit collusion and oil price formation," UiS Working Papers in Economics and Finance 2009/14, University of Stavanger.
  4. Demirer, RIza & Kutan, Ali M., 2010. "The behavior of crude oil spot and futures prices around OPEC and SPR announcements: An event study perspective," Energy Economics, Elsevier, vol. 32(6), pages 1467-1476, November.

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