Country Cartels

Abstract

We analyze collusion under demand uncertainty by cartels such as OPEC that care about the utility derived from profits by citizens. When citizens are sufficiently risk averse and fixed operating costs are non-trivial, it becomes difficult for cartels to collusively restrict output both when demand is low and marginal dollars are highly-valued, and when demand is high and potential defection profits are high: output relative to monopoly levels becomes a U-shaped function of demand. Greater risk aversion or higher fixed operating costs make collusion more difficult to support in recessions, but easier in booms.

Keywords: Collusion, Oligopoly, Risk Aversion, International Oligopolies, OPEC

JEL Classification: D43, L13, L21, C73, L11