Inscrutable OPEC: Behavioral Tests of the Cartel Hypothesis

54 Pages Posted: 8 Jan 2003  

James L. Smith

Southern Methodist University (SMU) - Edwin L. Cox School of Business

Date Written: November 13, 2002

Abstract

We show that statistical tests of OPEC behavior have very low power across a wide range of alternative hypotheses regarding market structure. Consequently, it is difficult, given the current availability and precision of data on demand and costs, to distinguish collusive from competitive behavior in the world oil market. This, along with other factors, may account for the largely inconclusive nature of findings so far reported in the empirical literature on OPEC. We develop a new approach for examining alternative hypotheses and find strong evidence of cooperative behavior among OPEC members. Our results also suggest that OPEC's formal quota mechanism, introduced in 1982 to replace a system based on posted prices, increased transactions costs within the organization. We do not find strong evidence to support the view that Saudi Arabia has played the role of dominant producer within the cartel.

Keywords: OPEC, cartel, quotas, cooperative behavior

JEL Classification: D43, L11, L13, Q41

Suggested Citation

Smith, James L., Inscrutable OPEC: Behavioral Tests of the Cartel Hypothesis (November 13, 2002). Available at SSRN: https://ssrn.com/abstract=353140 or http://dx.doi.org/10.2139/ssrn.353140

James L. Smith (Contact Author)

Southern Methodist University (SMU) - Edwin L. Cox School of Business ( email )

P.O. Box 750333
Dallas, TX 75275-0333
United States
(214) 768-3158 (Phone)

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