Microeconomics Case Study

OPEC: The Economics of a Cartel (B)

OR

Abstract:
The second case, in the three part case study series, deals with competitive dynamics of OPEC. In economics some words are considered notorious for their implications – one such word is cartel. Everyone who saw ‘God Father’, would draw parallels to cartel’s clandestine motives and actions. After having established the objectives of forming OPEC, this case enables the students to debate on the ways and means adopted to reach its objectives. Even if the OPEC countries produce oil at lower levels than their capacity, they would still have surplus, but the global oil supplies will be strangled. The OPEC members used this strategy to control global oil prices as early as in 1970s. However, by mid-1980s OPEC was unable to withstand the competitive pressures from the non-OPEC countries. Under these circumstances OPEC started to behave more like a cartel and faced many challenges.

This case could be used to analyse pricing mechanism of oil and, the effects of cartelisation on supply and demand in the global oil supplies.

Pedagogical Objectives:

• To analyse the effects of cartelisation on the producers and consumers
• To understand differences in the operations of OPEC and non-OPEC countries in controlling their respective oil supplies.

Keywords : Oligopoly, Characteristics of Oligopoly Market, Imperfect Competition, Cartel, Cartelization, OPEC, Kinked Demand Curve, Price Leadership, Price Manipulation, World Oil Demand, Demand for and Supply of Oil, Demand Curves, Supply Curves, Equilibrium of Demand and Supply, Crude Oil, Petroleum Products, Pricing of Petroleum Products, Value Chain in Oil and Petroleum Industry, Price Maker, Price and Output Determination in Monopoly, Price Discrimination, Degrees of Price Discrimination, Managerial Economics, Microeconomics, Economics for Business, Business Economics, Economics for Managers, Paul Samuelson