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??


Another leg down for oil


OPEC to Putin: no sympathy.  Source: Amibroker.

OPEC to Putin: no sympathy. Source: Amibroker.

Looks like prices at the pump have nowhere to go but down.  Thanks to typical Cournot competition resulting from lack of collusion, all the OPEC players lose.

Not even Qatar will like WTI below $71, or Brent below $75:

Agreeing to disagree = no one happy.  Source: BBC News

Agreeing to disagree = no one happy. Source: BBC News

Update: as WTI took out stops @ 69.50, nearly kissing the 69 level, we’re now kinda below the territory the pundits mentioned oil would go without an OPEC cut.  A couple thoughts:

  • Wow.  Oil falls fast.
  • Unlike the moves in several other commodities, I’m not convinced this oil move is principally a strong-USD bet.  I think it’s mainly just a way-oversupplied oil market with lots of players who can’t feasibly stop producing.  The countries need even the discounted revenue to maintain budgets and services.  So, for oil-consumers, this is about as close to ‘Happy Christmas from the Middle East’ as we’re going to get.