The Organization of the Petroleum Exporting Countries (OPEC) has succeeded in raising the price of oil substantially. For example, during the 1970s, the oil prices were increased by over 700 percent and this made the exporters of other natural resources imitate the OPEC model including the Intergovernmental Council of Copper Exporting Countries (CIPEC). However, CIPEC, unlike OPEC has failed to increase the price of copper. A number of reasons can be attributed to OPEC success including its control of about 76 percent of the world’s oil supply (Levenstein & Suslow 2006). Moreover, Oil has inelastic demand because it has no close substitutes and its price elasticity is less than one. These conditions therefore make OPEC successful in raising the oil prices and hence the revenue of its member states. CIPEC on the other hand controls less than 50 percent of the World’s copper supply thus making it difficult for them to control the copper prices in the world. Another problem is the differing social and political conditions and also differences in the mining conditions among the member states (Levenstein & Suslow 2006). Moreover, copper, unlike oil has close substitutes such as aluminum and plastics thus having an elastic demand.
b) Conditions Necessary for Successful Cartelization
For any cartel to be successful in its operations and increase the price of their product, a number of conditions should prevail. First, the commodity itself should have a relatively inelastic to ensure that an increase in price will not affect the demand of the commodity consequently reducing the sales and revenue to the member parties (Levenstein & Suslow 2006). OPEC successfully increased the oil prices and it had no effect on the global demand of the commodity because it has no close substitutes.
Second, for a cartel to be successful, then it must have a small number of members. A small number of members in the cartel make decision making process easier. The members can easily make agreements and abide by them thus making it effective. An effective cartel ensures that there is no cheating amongst its members with regard to the prices of the commodity.
Third, the cartel should control a significant portion of the whole market. It will be difficult for a cartel to restrict the amount of output in the market and increase the market price if they only control a small share of the market (Levenstein & Suslow 2006). The cartel should control at least 50 percent of the total market size to ensure that the actions of the non-cartel members do not affect the sales volume of the cartel.
c) Organizational Problems that a Cartel must overcome
For its endurance, a cartel must address a number of problems including cheating and coordination. Cheating problem is difficult to cartels including OPEC. Any restrain on the outputs results in a free rider problem (Levenstein & Suslow 2006). Most members of any cartel will tend to produce more quantity than the quotas assigned and this results in prisoners dilemma. Every cartel should therefore design a system which detects and punish the cheaters.
Coordination among the members of any cartel is sometimes a problem, and it needs to be addressed. For example, due to the differences in economic and demographic factors among the OPEC members, individual member states interests do not automatically align with a single ‘agreed’ price or the production targets (Levenstein & Suslow 2006). Partially, this is because OPEC has limited means of redistributing earnings among its members. Consequently, the stipulated quotas determine both the profits of OPEC and the revenues accrued to each member state. Coordination requires an agreement by the cartel members on the total output aggregation to the members and the amount to be produced.
BOYES, W. J., & MELVIN, M. (2012). Microeconomics. Mason, OH, South-Western Cengage Learning.
LEVENSTEIN, M. C., & SUSLOW, V. Y. (2006). What determines cartel success? Journal of Economic Literature (Stanford). 44, 43-95.