Endogenous shifts in OPEC market power - A Stackelberg oligopoly with fringe
AbstractThis 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 than a standard simultaneous-move, one-stage Nash-Cournot model with a fringe. I also discuss how most large-scale numerical equilibrium models, widely applied in the energy sector, over-simplify and misinterpret market power exertion. Furthermore, I show that this two-stage Stackelberg model can be solved numerically as a Mixed Complementarity Problem with heterogeneous firms and discuss uniqueness. --
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Bibliographic InfoPaper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order with number 79758.
Date of creation: 2013
Date of revision:
Other versions of this item:
- 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.
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-02-02 (All new papers)
- NEP-COM-2014-02-02 (Industrial Competition)
- NEP-ENE-2014-02-02 (Energy Economics)
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