From Cournot to Bertrand equilibria: OPEC giving discounts

Dusting off my old economics lessons, I recognised a couple concepts from today’s Bloomberg article on Iraq joining Saudi Arabia in giving oil price discounts.

In particular, oligopoly behaviour can frequently be modelled by quantity-based competition (Cournot, and old OPEC) or by price-based competition (Bertrand, and what we see today in OPEC).  The key point, as this Brown University lecture note states very well, is:

We conclude that in a Bertrand equilibrium, in the homogeneous good case, under the assumptions we have made, firms 1 and 2 will charge the same price, and the price will be equal to marginal cost. But this means that the duopoly market, in the Bertrand model with a homogeneous good, looks just like a competitive market. In particular, there is no inefficiency (no loss of social surplus) in the duopoly market. 

So go ahead and call up your local OPEC representative and thank him/her for providing a market-clearing, maximum efficiency price for oil consumers.  WTI oil has broken $63/barrel recently, which surely means $1.75/gallon gas for US drivers at some point??

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