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Endogenous shifts in OPEC market power - A Stackelberg oligopoly with fringe

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  • Huppmann, Daniel
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 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.

Suggested Citation

  • Huppmann, Daniel, 2013. "Endogenous shifts in OPEC market power - A Stackelberg oligopoly with fringe," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79758, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc13:79758
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    3. 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.
    4. Alberto Behar & Robert A. Ritz, 2016. "OPEC vs US shale oil: Analyzing the shift to a market-share strategy," Working Papers EPRG 1612, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    5. 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.
    6. 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.
    7. 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.
    8. Durand-Lasserve, Olivier & Pierru, Axel, 2021. "Modeling world oil market questions: An economic perspective," Energy Policy, Elsevier, vol. 159(C).
    9. repec:diw:diwwpp:dp1548 is not listed on IDEAS
    10. 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.
    11. 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.
    12. repec:diw:diwwpp:dp1370 is not listed on IDEAS
    13. 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.
    14. 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.
    15. repec:bny:wpaper:0096 is not listed on IDEAS
    16. Daniel Huppmann & Franziska Holz, 2015. "What about the OPEC Cartel?," DIW Roundup: Politik im Fokus 58, DIW Berlin, German Institute for Economic Research.
    17. repec:bny:wpaper:0082 is not listed on IDEAS

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    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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