The Incentive to Cheat: An Empirical Analysis of OPEC

Abstract

Relatively little is known about the payoffs to various kinds of strategies facing OPEC cartel members. We propose an empirically tractable procedure to calculate the payoffs to relevant OPEC strategies. Fresh insights into the problem of the quota system and deterring cheating are presented, stressing the importance of the nonrenewability of the oil stock, the short‐run rigidity of demand, short‐term capacity constraints, the presence of a backstop technology, and the different discount rates the cartel members are facing. We conclude that punishment is a dominant strategy for the Saudis and that the finite resource base in the oil industry substantially attenuates the incentive to cheat. Also, the biased market quota system in favor of small producers weakens, but does not eliminate, their incentive to cheat. In addition, we compute the price paths and payoffs corresponding to competitive, Cournot, and joint‐profit‐maximization solutions and contrast them with the actual historical patterns of OPEC behavior.

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