An Analysis of Cartelized Market Structures for Nonrenewable Resources

Robert A. Marshalla

• Publisher: Taylor & Francis
• Year: 2017
• eBook ISBN: 9781351593533
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Negocios en general

Originally published in 1979. While the theory of non-renewable resources under competitive and monopolistic market regimes have been relatively well developed, almost no attention has been given to the development of a theoretical framework for analysis of the spectrum of mixed market structure between those extremes. The world oil market structure is an example of such an intermediate market structure. The purpose of this title is to develop such a theoretical framework. The study examines non-renewable resource markets in which a profit maximizing producer cartel co-exists with a non-cartel supply sector, which is alternately modelled as consisting of a collection of competitive firms or as exhibiting other exogenously assumed supply behaviours. This title will be of interest to students of environmental economics.

CHAPTER 1

INTRODUCTION AND OVERVIEW

1. Introduction

The Organization of Petroleum Exporting Countries (OPEC) has emerged as a striking success with respect to the exercise of monopoly power in a major international market. Within a period of approximately a year starting in October, 1973, it succeeded in more than quadrupling the world price of crude oil. Recent studies foresee continued bright prospects for OPEC (for example, see deVries [19], Adelnvm [1], CIA [12], Oil and Gas Journal [56], and FEA [24]). There have been successful international cartels before, but never with such dramatic economic and political impacts. In the words of economist and long-time energy industry expert Maurice Adeiman, it is “the greatest monopoly in history.”^* The success of OPEC has spawned hopes and fears of cartelization of other basic commodities. Among the nonrenewable resources, future cartelization prospects have been discussed for minerals such as bauxite [59,77], tin [5,26], copper [4,58], nickel [2], cobalt [2], and manganese [2]. Among the renewable resources, coffee, tea, cocoa, anc bananas, among others, have been considered.^** Although opinion remains divided on the prospects for success among these other commodities (and, until recently, concerning OPEC’s prospects as well), what is certain is that the question of the nature of requisite factors for cartel success has taken on a new and special sense of urgency.

A great deal of literature has appeared in the popular press, in policy oriented journals and in government reports examining the political economy of OPEC and other raw material cartels, past, present, and potential future. A good review and interpretation of the research literature from economics and political science covering 51 international cartel agreements in 18 industries can be found in Eckbo [21]. Recent government reports include [24], [12], [74], [75], and [76]. Still, the debate continues over whether OPEC’s great success should be considered as an exception to the rule, or as a precursor for greater success in other international cartelization ventures. A good sampling of the debate can be found in Krasner [47] and Smart [66] who argue the former, and Bergsten [7,8] and Mikdashi [53] who argue the latter.

Most of this literature focuses on political, institutional and economic forces specific to particular cartels. The present study, though inspired by questions raised in an empirical model of OPEC, is not about a particular cartel. Its goal is to gain a better analytical understanding of some of the basic economic factors underlying successful cartels, not to generate numerical forecasts of any sort.

2. Topic Defined

This study can be defined as an analysis of partially cartelized market structures for nonrenewable resources, which means markets where a cartel coexists with a substantial non-cartel sector. The goal is to develop and utilize a modeling framework wherein a spectrum of market structures between pure competition and pure monopoly can be analyzed as a function of cartel size, where cartel size is defined as the fraction of the market’s reserves it controls. The succeeding subsections discuss why the topic has been defined as it has; that is, why it is focused on (1) nonrenewable, resources that are (2) under partially cartelized market regimes, and (3) why the special concern with cartel size.

2.1 Why Nonrenewable Resources

The decision to focus specifically on nonrenewable resource cartels rather than cartels in general has to do with the special economic features of nonrenewable resources. A nonrenewable resource is here defined to be a resource that is depletable and/or increasing cost. The term “depletable” is used to denote a resource for which the initial finite stock is ultimately entirely depleted by its producers. The term “increasing cost” is used to describe a resource whose extraction cost increases with cumulative production. Several of the features of nonrenewable resources which call for special treatment in a study of cartels might be placed in the two general categories of dynamics and limits-to-entry:

(1) Dynamics – Dynamics enter the analysis of a nonrenewable resource in a special and more central way than for other types of products. The opportunity cost of extracting an additional unit of resource under any market structure depends on how its extraction may increase the cost of future units extracted along a given production schedule (a user cost) and/or on how it may hasten the day of resource exhaustion (a Hotelling scarcity rent). To assess these costs requires an explicit model of the entire future history of the market. Moreover, these future-based opportunity costs may by far dominate the current out-of-pocket costs (e.g., see Nordhaus [55], Marshalla [51], and Kalymon [44]).

This makes any analysis of cartel market power particularly more involved than for a normal product. The impact of the cartel on price cannot be measured simply as price minus out-of-pocket marginal cost. It cannot even be measured as price minus the more involved opportunity cost (out-of-pocket cost plus user cost plus scarcity rent) that is actually developed under a cartelized regime, but rather as price minus what this opportunity cost would have been under a pure competitive regime.

In addition, the relationships of prices, outputs, costs or any other economic variables between two different market regimes will not, in general, be constant over time at their initial values because the two regimes will deplete the resource stock at different rates. (Only at time zero will the cumulative stocks depleted be the same for the two market regimes.)

(2) Limits-to-entry – Limits-to-entry is often a crucial factor in a study of monopoly or other forms of imperfect competition. Nonrenewable resources, by definition, imply special constraints on the potential supply from new entrants due to the fact that there exists only a fixed total quantity of the resource itself, or of each cost grade of the resource. Whichever feature is active, there may exist only a small number of major resource deposits and all or most of them may already be discovered and controlled by established producers. Therefore, all else equal, a particularly profitable market for existing producers of nonrenewable resources could be expected not to lead to the same flood of new entrants as might be expected in a market for a normal good.

Thus, a general model of partial monopoly which failed to account for the special features of nonrenewable resources would be of little use here. In fact, if it were necessary to categorize, the primary area of this research would be labeled “nonrenewable resources”, with “cartelized market structures” as the sub-category.

2.2 Why Partial Cartelization

Most of the theoretical work on nonrenewable resources has treated the extreme cases of pure competition or pure monopoly.^* In most interesting cases of cartels, however, there remain a substantial number of suppliers outside the cartel whose behavior might be modeled separately. In most of the sequence of models that comprise this study, they will be modeled as a competitive sector; that is, as a collection of price-taking, profit maximizing firms. In the case of oil, for example, nonOPEC suppliers have, since 1973, been responsible for about a third of oil production outside of the Communist bloc. It may seem plausible to believe that a partially cartelized market would exhibit behavior that is some simple convex combination of that under the extremes of pure competition and pure monopoly. However, the extremes are limiting cases and one should not, a priori, rule out the possibility of qualitative differences in between. More importantly, even if the partial monopoly solution were to lie between the extreme case solutions, it is not obvious how the effects of monopolization would be realized as a function of carte size, as that size went from zero to 100% of the market. If the changes were linear with respect to the size of cartel, for example, a potential addition or deletion of members to a given size cartel would imply different consequences for future market performance – and perhaps different policy implications for all concerned – than if the analyses were to show sharply increasing or decreasing returns to scale with respect to cartel size.

Finally, there is an important structural difference between the models of the polar cases of competition or monopoly, and the intermediate case of partial cartelization. The partial case is really a combination of the other two, but more complicated than either. Both sectors' supply models must be satisfied simultaneously. The cartel maximizes profits as in the pure monopoly case, but with the added constraints that the competitive sector’s equilibrium conditions continuously be satisfied. In general, it is not possible to simply derive a price/supply function or other static reaction function which summarizes competitive sector behavior.

2.3 Why Cartel Size

The central issue of this research is how the relative size of the cartel affects the economic performance of the resource market. Surely this is not the only important factor affecting the extent to which a cartel can influence its market. In Eckbo’s study of the experience of 51 international cartels [21], he concludes that the four factors most important in the longevity of what he calls efficient – i.e., successful – cartels were high concentration of production, inelastic demands, lack of government involvement, and operating cost advantages enjoyed by at least a few key cartel members.

Other factors deemed potentially important included tight control of distrib...

Table of contents

• Cover Page
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• Chapter 1 – Introduction and Overview
• Chapter 2 – One-Sided Cartel Models - General and Special Case Versions (Models A and A.l)
• Chapter 3 – Dynamic Demand in a One-Sided Cartel Model
• Chapter 4 – Two-Sided Cartel Models
• Chapter 5 – Two-Sided Cartel Model – Elastic Demand, Constant Cost Resources (Model B.1)
• Chapter 6 – Two-Sided Cartel Models – Inelastic Demand, Alternate Resource Representations (Models B.2, B.21, B.22 and B.23)
• Chapter 7 – Summary of Results
• References