In this lecture, Jan De Loecker, KU Leuven, will present his paper 'Beyond the First Best: A Framework for Evaluating the Welfare Effects of Market Power. Evidence from the OPEC Cartel'
This paper introduces an empirical framework to quantify the welfare impact of market power through coordinated production decisions by a cartel, while allowing
for other distortions. It contrasts two novel concepts – the marginal and the infra-marginal welfare loss – to the standard approach to assess welfare effects.
The framework is applied to measure the impact of market power of OPEC in the global crude oil market. Unique microdata on cost and production are leveraged to quantify the deadweight loss and productivity inefficiency due to the OPEC cartel.
It was found that from 1970 to 2021, the OPEC cartel generated 2.6 trillion dollars of welfare losses, with 2/3 occurring due to productive inefficiency, the failure to minimise the cost of production, and 1/3 from deadweight loss, the absence of beneficial transactions between producers and consumers. Recognising that frictions other than the OPEC cartel are at play, substantially
smaller losses were found, around 1.2 trillion dollars, when eliminating the sources of cost minimisation violations outside the cartel. This indicates that frictions in the
market for oil are complementary to the OPEC cartel’s exercise of market power, and that the cartel’s impact on market outcomes is effective through the muted
response of the fringe.
Register