Market Power, Production (Mis)Allocation and OPEC
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.
We would like to thank Russell Cooper, Martin Hackmann, Volker Nocke, Michael Whinston, Rob Porter, and Jo Van Biesebroeck, and participants in various seminars and conferences for their comments. Excellent research assistance was provided for by El Hadi Caoui, Ardis Zhong, Sherry Wu and Yilin Jiang. Financial Assistance from Princeton University's Industrial Organization Group, NSF (SPS #220783) and FWO Odysseus Grant is greatly appreciated. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
- Because the lowest-cost oil producers are OPEC members, unrestrained production by cartel members would substantially reduce Russian...