Monopoly Power in the Oil Market and the Macroeconomy

Abstract

This paper studies macroeconomic consequences of oil price shocks caused by innovations in the monopoly power in the oil market. Monopoly power is interpreted as oil producers' ability to charge a markup over marginal costs. We propose a novel way to identify markup shocks based on meetings of the OPEC and show their unique macroeconomic consequences compared to supply and demand shocks. In particular, global real economic activity persistently expands when oil producers' monopoly power rises. A general equilibrium model suggests that higher monopoly profits attract investments in oil producing capital which drive down marginal costs and stimulate economic growth.

Keywords: Monopoly, OPEC, Oil Shocks, VAR, DSGE, Real Business Cycle

JEL Classification: C32, E23, E32, L12, L71, Q43