Strong time-consistency in the cartel-versus-fringe model

Groot, F.; Withagen, Caam Cees; Zeeuw, AJ de

doi:10.1016/s0165-1889(02)00154-9

Cited by 64 publications

(42 citation statements)

References 16 publications

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“…Typically, the monopolist OPEC is considered together with a competitive fringe of price-following oil producers. One feedback Nash outcome is an initial phase where the monopolist sets prices low enough to exhaust the fringe and a final phase where the monopolist enjoys higher monopoly profits; the price at the end of the first phase is then not high enough to incite the fringe to postpone extraction (Newbery, 1981;Groot et al, 2003).…”

Section: Preamble: Optimal Conversion Of Depleting Natural Resources mentioning

confidence: 99%

Natural Resources: Curse or Blessing?

Ploeg

2011

Journal of Economic Literature

1,411

177

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract Are natural resources a "curse" or a "blessing"? The empirical evidence suggests either outcome is possible. The paper surveys a variety of hypotheses and supporting evidence for why some countries benefit and others lose from the presence of natural resources. These include that a resource bonanza induces appreciation of the real exchange rate, deindustrialization and bad growth prospects, and that these adverse effects are more severe in volatile countries with bad institutions and lack of rule of law, corruption, presidential democracies, and underdeveloped financial systems. Another hypothesis is that a resource boom reinforces rent grabbing and civil conflict especially if institutions are bad, induces corruption especially in non-democratic countries, and keeps in place bad policies. Finally, resource rich developing economies seem unable to successfully convert their depleting exhaustible resources into other productive assets. The survey also offers some welfare-based fiscal rules for harnessing resource windfalls in developed and developing economies. Terms of use: Documents inJEL-Code: C12, C13, E01, F43, K42, O41, Q30.

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Section: Preamble: Optimal Conversion Of Depleting Natural Resources mentioning

confidence: 99%

Natural Resources: Curse or Blessing?

Ploeg

2011

Journal of Economic Literature

1,411

177

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“…The reason is that neither the oil market dominated by OPEC nor the gas market dominated by Russia, Iran, Qatar and Venezuela can be characterized as competitive. It goes beyond the scope of the present paper to extend the cartel-fringe model (e.g., Groot et al, 2003) by allowing for a renewable backstop and the interactions with climate change. However, we do pay attention to the case of a resource-owning monopolist, in order 8 In Section 5, introduced in point 5 below, we implicitly allow for backstops varying in production costs.…”

Section: Introductionmentioning

confidence: 99%

Is there really a green paradox?

Ploeg¹,

Withagen²

2012

Journal of Environmental Economics and Management

Self Cite

211

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The Green Paradox states that, in the absence of an appropriate tax on CO2 emissions, subsidizing a renewable backstop such as solar or wind energy brings forward the date at which fossil fuels become exhausted and consequently global warming is aggravated. We shed light on this issue by solving a model of depletion of non-renewable fossil fuels followed by a switch to a clean renewable backstop, paying attention to timing of the switch and the amount of fossil fuels remaining unexploited. We show that the Green Paradox occurs if the backstop is relatively expensive and full exhaustion of fossil fuels is optimal, but does not occur if the backstop is sufficiently cheap relative to the cost of extracting the last drop of fossil fuels plus marginal global warming damages as then it is attractive to leave fossil fuels unexploited and thus limit CO2 emissions. We show that, without a carbon tax, subsidizing (taxing) the backstop might enhance social welfare if fossil fuel reserves are not fully (fully) exhausted. We also discuss the potential for limit pricing when the non-renewable resource is owned by a monopolist. Finally, we show that if backstop are already used and there is a new sequence of backstops becoming economically viable as the price of fossil fuels rises, a lower cost of the backstop will either postpone fossil fuel exhaustion or leave more fossil fuel in situ, thus boosting green welfare. However, if a market economy does not internalize global warming externalities and renewables have not kicked in yet, full exhaustion of fossil fuels will occur in finite time and a backstop subsidy always curbs green welfare.

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“…The second effect works in the opposite direction. In this case, the cartel would like to announce ambitious output targets so as to pre-empt supply by the non-OPEC fringe, even when such a strategy would not be credible ex-post (Groot et al, 2000(Groot et al, , 2003.…”

Section: Methodsmentioning

confidence: 99%

Imperfect Cartelization in OPEC

Okullo

Reynès

2016

SSRN Journal

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A model of global oil production is applied to study cartelization by OPEC countries. Writing out the shadow price on quota allocations so as to draw correspondence to coefficients of cooperation (Cyert et al. 1973), we examine the incentives that different OPEC members to collude. We find that heterogeneity in OPEC and the supplies of the non-OPEC fringe create strong incentives against OPEC cooperation. OPEC's optimal supply strategy although observed to be substantially more restrictive than that of a Cournot-Nash oligopoly, is found to still be more accommodative than that of a perfect cartel. The strategy involves allocating larger than proportionate quotas to smaller and relatively costlier producers as if to bribe their participation in the cartel. This is contrary to predictions of the standard cartel model that such producers should be allocated relatively more stringent quotas.Furthermore, we find that cartel collusion is likely to be sustained for elastic than inelastic demand. Since global oil demand is well known to be inelastic, this observation provides another structural explanation for why OPEC behavior is inconsistent with that of a perfect cartel. Our study points to multiple headwinds that limit OPECs ability to raise long-run global oil prices.

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Strong time-consistency in the cartel-versus-fringe model

Cited by 64 publications

References 16 publications

Natural Resources: Curse or Blessing?

Natural Resources: Curse or Blessing?

Is there really a green paradox?

Imperfect Cartelization in OPEC

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