Market Power, Production (Mis)Allocation, and OPEC

Abstract

This paper estimates the extent to which market power is a source of production misallocation. Productive inefficiency occurs through more production being allocated to higher cost units of production, and less production to lower-cost production units, conditional on a fixed aggregate quantity. We rely on rich micro-data covering the global market for crude oil, from 1970 to 2014, to quantify the extent of productive misallocation attributable to market power exerted by the OPEC. We find substantial productive inefficiency attributable to market power, ranging from 14.1 percent to 21.9 percent of the total productive inefficiency, or 105 to 163 billion USD.

Keywords: Market Power, Productive Inefficiency, Misallocation, Cartels, Oil, OPEC

JEL Classification: D2, L1, L4, L72