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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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  • Daniel Huppmann, 2013. "Endogenous Shifts in OPEC Market Power: A Stackelberg Oligopoly with Fringe," Discussion Papers of DIW Berlin 1313, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp1313
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    Cited by:

    1. Langer, Lissy & Huppmann, Daniel & Holz, Franziska, 2016. "Lifting the US crude oil export ban: A numerical partial equilibrium analysis," Energy Policy, Elsevier, vol. 97(C), pages 258-266.
    2. Alberto Behar & Robert A. Ritz, 2016. "OPEC vs US shale oil: Analyzing the shift to a market-share strategy," Cambridge Working Papers in Economics 1623, Faculty of Economics, University of Cambridge.
    3. Behar, Alberto & Ritz, Robert A., 2017. "OPEC vs US shale: Analyzing the shift to a market-share strategy," Energy Economics, Elsevier, vol. 63(C), pages 185-198.
    4. Devine, Mel T. & Siddiqui, Sauleh, 2023. "Strategic investment decisions in an oligopoly with a competitive fringe: An equilibrium problem with equilibrium constraints approach," European Journal of Operational Research, Elsevier, vol. 306(3), pages 1473-1494.
    5. Huppmann, Daniel & Egging, Ruud, 2014. "Market power, fuel substitution and infrastructure – A large-scale equilibrium model of global energy markets," Energy, Elsevier, vol. 75(C), pages 483-500.
    6. Even Comfort Hvinden, 2019. "OPEC's crude game," Working Papers No 10/2019, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
    7. Thomas St�rdal Gundersen & Even Soltvedt Hvinden, 2021. "OPEC's crude game: Strategic Competition and Regime-switching in Global Oil Markets," Working Papers No 01/2021, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
    8. Ansari, Dawud, 2017. "OPEC, Saudi Arabia, and the shale revolution: Insights from equilibrium modelling and oil politics," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 111, pages 166-178.
    9. Feijoo, Felipe & Huppmann, Daniel & Sakiyama, Larissa & Siddiqui, Sauleh, 2016. "North American natural gas model: Impact of cross-border trade with Mexico," Energy, Elsevier, vol. 112(C), pages 1084-1095.
    10. Ibrahim Abada & Andreas Ehrenmann, 2016. "The prisoner’s dilemma in Cournot models: when endogenizing the level of competition leads to competitive behaviors," Cambridge Working Papers in Economics 1641, Faculty of Economics, University of Cambridge.
    11. Nathan S. Balke & Xin Jin & Mine K. Yücel, 2020. "The Shale Revolution and the Dynamics of the Oil Market," Working Papers 2021, Federal Reserve Bank of Dallas.
    12. Daniel Huppmann & Franziska Holz, 2015. "What about the OPEC Cartel?," DIW Roundup: Politik im Fokus 58, DIW Berlin, German Institute for Economic Research.
    13. Mr. Alberto Behar & Robert A Ritz, 2016. "An Analysis of OPEC’s Strategic Actions, US Shale Growth and the 2014 Oil Price Crash," IMF Working Papers 2016/131, International Monetary Fund.
    14. Durand-Lasserve, Olivier & Pierru, Axel, 2021. "Modeling world oil market questions: An economic perspective," Energy Policy, Elsevier, vol. 159(C).

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    More about this item

    Keywords

    crude oil; OPEC; oligopoly; Stackelberg market; market power; consistent conjectural variations; equilibrium model;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • L71 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Mining, Extraction, and Refining: Hydrocarbon Fuels

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