Imperfect Cartelization in OPEC

By making use of coefficients of cooperation [8] in a global oil model where OPEC producers are the dominant players and non-OPEC is the competitive fringe, we ask whether OPEC producers have strong incentives for imperfect collusion. First, assuming that OPEC members withhold supply only when their profits are increasing in the level of cooperation, we find that (i) there are positive incentives for imperfect cartelization within OPEC, and (ii) that perfect cartelization in OPEC is likely to be sustained when demand for OPEC oil is substantially elastic. Next, we propose a bi-level model for OPEC cartelization that embodies Nash bargaining strategies in cooperation (upper level of the game) and endogenous conjectural variations in production strategies (lower level of the game). Using this formulation, OPEC’s optimal cohesion structure is generated endogenously. Simulation results confirm that OPEC is plausibly much more than a group of Cournot oligopolistic producers, but less than a perfect cartel.