The Economic Consultant Position Determining Future of OPEC, Essay Example

The peer-reviewed journal article entitled “Antitrust Enforcement with Price-Dependent Fines and Detection Probabilities” documents a study that set out to determine the efficacy of antitrust enforcement. The fines are derived from the cartel prices, and the likelihood of the identifying the infringement of antitrust laws is also dependent on the cartels. The use of these antitrust laws eliminates the possibility of monopolies and their control on prices. Despite the laws, price-fixing is still a major problem in the global economy (Houba et al., 2010). This study sets out to replicate previous studies conducted to determine the most efficacious way to deter cartels and collusion practices.

This study compares one methodology in reducing the existence of collusion and cartels to the other most eminent methodology. The first mechanism observes the market price fluctuations  to determine the penalty imposed on antitrust violators. The second mechanism uses fixed-amount fines for violations incurred against antitrust laws. At the conclusion of this study, the researchers found both methodologies and  the implementation of both policies was not mutually exclusive.

When fines are proportioned according to the profits which were illegally obtained allows maximum profit for cartel prices even in the cases when fines are static (McKinnon, 1973). The profit for the cartel prices remains below the monopoly price.

By analyzing the repeated oligopoly model, keeping all other variables constant, the efficacy of penalties as a deterrent to violations is determined. This study examined the various penalties derived from two distinct methodologies to determine the optimum efficacy in deterring cartels and collusion. Some of the results obtained confirmed the standard practice as being effective and other data supported the new methodology. The constant detection probability showed fixed fines had no efficacy in keeping the cartel pice below the monopoly price.

Saudi Arabia has strong government controls over major economic activities. It possesses one-fourth 1/4 of all petroleum reserves. With its multiple oil reserves, the country still maintains low production costs and therefore will most likely remain the number one exporter of petroleum for a long time to come. The oil reserves also help in lowering the unemployment rate which generally hovers around 15%. The petroleum sector accounts for roughly 75% of revenues and 45% of GDP. About 40% of GDP comes from the private sector(Cameron, 1995).

But the country made the mistake of establishing higher oil prices in the early 1980s, which caused more oil fields to be set up across the world and reduced global consumption. In response to financial pressure, OPEC finally began use of a production quota (Ibid). As a result of several factors in recent years, however, demand for oil slowed and caused a decline in oil prices.Through multiple development plans, the government of Saudi Arabia living conditions have improved.

References

Houba, Harold, Evgenia Motchenkova, and Quan Wen. “Antitrust Enforcement with Price-Dependent Fines and Detection Probabilities.” Economics Bulletin 30.3 (2010): n. pag. Retrieved November 27, 2010

Cameron, R. Banking and Economic Development: Some Lessons of History. New Fry, M. Money, Interest, and Banking in Economic Development. Baltimore: John Hopkins University Press, 1995.

McKinnon, R. Money and Capital in Economic Development. Washington: D.C. Brooking Institution, 1973.