Knowledge that Transforms

Cartels are inherently unstable. At the joint profit-maximizing price and output every member has an individual incentive to expand output, secretly if possible, and cheat on the cartel even though it is better off with the cartel intact than if the cartel dissolved and the members competed. Dale Osborne has recently proposed a rule for cartel members which, if followed, will pose a credible threat of lost profits to potential cheating members and thereby reduce the inherent instability of the cartel. The rule is simple: once cheating in the form of increased output is detected, each member should increase output in the same proportion as the cheater so as to maintain the same share of the output as under joint profit maximization. This market share maintenance rule forces the cheater to share in the decline of profits and hence induces it to help the loyal members revitalize the cartel or, perhaps, not cheat in the first place. Following this rule the cartel should be far more stable than traditional theory would predict, consistent with the recent history of the Organization of Petroleum Exporting Countries (OPEC) which has remained remarkably stable despite prices incredibly far above some members' costs. The purpose of this comment is to point out some improvements in Osborne's analysis. In Section I it is shown that his proof that the market share maintenance line has a common tangency with all of the cartel members' iso-profit surfaces at the point of joint profit maximization is too restrictive. A more general proof is provided. In Section II it is pointed out that his proof that the market share maintenance rule provides the noncheater a profit-increasing retaliation against the cheater is not valid, but that the rule retains many advantages which Osborne does not mention. Section III points out some advantages of central purchasing agencies which Osborne has overlooked in his section on purchasing strategies.

The effects of price controls on oil production are examined for the period 1974 to 1976 and found to have had a negative elasticity in respect to world prices. The analysis considers the many regulatory changes that took place during the period and differentiates between the effects on independent and integrated producers and between production on old and new properties. New-property production reflects new exploration and expansion. The report concludes that, while controls may have caused initial increases in production, they were probably responsible for the subsequent decline. A supply curve has developed over the recent past that will result in a larger proportion of U.S. capital being transferred to the Organization of Petroleum Exporting Countries when future world prices increase.

The problem of determining short-run monetary policy is often posed as that of choosing which of several variables to take as the monetary instrument, which is understood to mean choosing which variable to maintain at a preassigned level under random shifts in the structural equations. In the simplest case, this problem has been unambiguously solved. Suppose that we have a static linear IS-LM structure with independent normally distributed errors and known coefficients:

The 1970s have witnessed significant changes in the trade policies and strategies of many LDCs. In the 1950s and 1960s most of them adhered to policies of import substitution behind highly restrictive quantitative controls, intensified by overevaluation of the exchange rate with attendant disincentives for export. In the past decade, there has been a marked reduction in the degree of bias toward import substitution. Even in countries where quantitative restrictions and tariffs continue to provide inducements for production for the domestic market much greater than incentive for sale abroad, bias is less extreme than in the past. In other countries, notably Brazil and South Korea, bias has been completely reversed, to a point where one might even claim a bias towards the foreign market and against the home market. This shift in trade policies has resulted from a number of factors, some specific to individual countries, but chiefly because of evidence that the excesses of import substitution were detrimental to growth.