Journal article
Escaping the tolerance trap: Implications of rigidity in OPEC's output adjustment mechanism
Energy economics, v 16(1), pp 3-8
1994
Abstract
In order to examine the implications of the weakening of OPEC's responsiveness in adjusting its production levels, this paper explicitly incorporates rigidity in the quantity adjustment mechanism, thereby extending previous research which assumed smooth quantity adjustments. The rigidity is manifested in a tolerance range for the discrepancy between the declared target price and that of the market. This environment gives rise to a ‘tolerance trap’ which impedes the convergence process and inevitably brings the market to a stanstill before it reaches the targeted price and revenue objectives. OPEC's reaction to the standstill has important implications for the achievement of the target-based equilibrium and for the potential collapse of the market price. This paper examines OPEC's policy options in the tolerance trap and reveals that the optimal policy in order to break this impasse and move closer to the equilibrium point is gradually to reduce output and not to flood the market (which unfortunately has happened in the past).
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Details
- Title
- Escaping the tolerance trap: Implications of rigidity in OPEC's output adjustment mechanism
- Creators
- Shawkat Hammoudeh - Drexel UniversityVibhas Madan - Drexel University
- Publication Details
- Energy economics, v 16(1), pp 3-8
- Publisher
- Elsevier
- Resource Type
- Journal article
- Language
- English
- Academic Unit
- Economics (School of Economics); Bennett S. LeBow College of Business
- Web of Science ID
- WOS:A1994ND74500001
- Scopus ID
- 2-s2.0-0028322743
- Other Identifier
- 991019174149804721
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- Web of Science research areas
- Economics