Microeconomics Case Study

OPEC: The Economics of a Cartel (C)

OR

Abstract:
The third and final case, in the three case series, deals with the output and pricing mechanism of oil among OPEC members. OPEC members decided upon output quotas and price levels of oil. In order to achieve higher profits, by crippling supplies in the international markets, they did not expand their outputs – which led to fluctuations in the prices. No increase in supplies made the dealers stock oil and further increase the price and OPEC, through this process, has made enormous profits. They also began to discriminate between their customers by following differential price mechanism – making OPEC the price leader. On the production side, quota system resulted in differences within the cartel and also with the non-OPEC countries. The strategy that OPEC and its each member followed is always debatable.

The case study helps analyse the strategies followed by OPEC and non-OPEC countries using Game Theory. It also helps in discussing the effects of differential pricing mechanism on consumers.

Pedagogical Objectives:

• To analyse the degrees of price discrimination
• To analyse the effect on producers and consumers using Game Theory
• To understand the pricing and output effects using Hotelling model and Edgeworth model.

Keywords : Oligopoly, Characteristics of Oligopoly Market, Imperfect Competition, Cartel, Cartelization, OPEC, Kinked Demand Curve, Price Leadership, Price Manipulation, World Oil Demand, Demand for and Supply of Oil, Demand Curves, Supply Curves, Game Theory Crude Oil, Petroleum Products, Pricing of Petroleum Products, Value Chain in Oil and Petroleum Industry, Price Maker, Price and Output Determination in Monopoly, Price Discrimination, Degrees of Price Discrimination, Managerial Economics, Microeconomics, Economics for Business, Business Economics, Economics for Managers, Paul Samuelson