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Oil market dynamics: A Markow chain analysis

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  • Melanie Parravano

    ()
    (Banco Central de Venezuela, Oficina de Investigaciones Económicas.)

  • Luis Enrique Pedauga

    ()
    (Banco Central de Venezuela, Oficina de Investigaciones Económicas.)

Abstract

Since the seventies the Organization of Petroleum Exporting Countries (OPEC) has exercised a monopolistic power playing a dominant role in the oil market, but with varying degrees of influence. The aim of this investigation is to determine which variables explain changes in OPEC’s market power during the last three decades, based on the assumption that oil market participants compete to maximize their market share in time. In particular, the estimation model assumes that the market participation of the two principal oil exporting country groups (OPEC and Non OPEC) follows an Autoregressive First Order Markov Process, in which transition probabilities vary in time by means of a logistic smooth transition function. Results suggest that the level of real oil prices and economic cycles are relevant variables to explain changes in market share dynamic.

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Bibliographic Info

Article provided by Instituto de Investigaciones Económicas y Sociales (IIES). Facultad de Ciencias Económicas y Sociales. Universidad de Los Andes. Mérida, Venezuela in its journal Economia.

Volume (Year): 33 (2008)
Issue (Month): 25 (january-june)
Pages: 87-115

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Handle: RePEc:ula:econom:v:33:y:2008:i:25:p:87-115

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Postal: Facultad de Ciencias Económicas y Sociales. Instituto de Investigaciones Económicas y Sociales. Campus Universitario Liria, Edificio G, Tercer Nivel. Mérida 5101, Estado Mérida, Venezuela
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Related research

Keywords: Oil market; market power; Markov process; logistic smooth transition.;

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  1. Lester C Hunt & Guy Judge & Yasushi Ninomiya, 2003. "Modelling Underlying Energy Demand Trends," Surrey Energy Economics Centre (SEEC), School of Economics Discussion Papers (SEEDS) 105, Surrey Energy Economics Centre (SEEC), School of Economics, University of Surrey.
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  3. MacRae, Elizabeth Chase, 1977. "Estimation of Time-Varying Markov Processes with Aggregate Data," Econometrica, Econometric Society, vol. 45(1), pages 183-98, January.
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  8. Vickers, John, 1995. "Concepts of Competition," Oxford Economic Papers, Oxford University Press, vol. 47(1), pages 1-23, January.
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  10. Kosobud, Richard F & Stokes, Houston H, 1978. "Oil Market Share Dynamics: A Markov Chain Analysis of Consumer and Producer Adjustments," Empirical Economics, Springer, vol. 3(4), pages 253-75.
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  12. Karp, Larry & Newbery, David M, 1991. "OPEC and the U.S. Oil Import Tariff," Economic Journal, Royal Economic Society, vol. 101(405), pages 303-13, March.
  13. James L. Smith, 2003. "Inscrutable OPEC? Behavioral Tests of the Cartel Hypothesis," Working Papers 0305, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
  14. Adelman, Morris Albert, 1986. "Scarcity and World Oil Prices," The Review of Economics and Statistics, MIT Press, vol. 68(3), pages 387-97, August.
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  16. Riccardo Cesari, 1994. "A generalized measure of competition," Working Papers 204, Dipartimento Scienze Economiche, Universita' di Bologna.
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