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

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  • Daniel Huppmann

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.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.424967.de/dp1313.pdf
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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 1313.

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Length: 26 p.
Date of creation: 2013
Date of revision:
Handle: RePEc:diw:diwwpp:dp1313

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Keywords: crude oil; OPEC; oligopoly; Stackelberg market; market power; consistent conjectural variations; equilibrium model;

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Cited by:
  1. Daniel Huppmann & Ruud Egging, 2014. "Market Power, Fuel Substitution and Infrastructure: A Large-Scale Equilibrium Model of Global Energy Markets," Discussion Papers of DIW Berlin 1370, DIW Berlin, German Institute for Economic Research.

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