DYNAMIC DEMAND AND OPTIMAL OPEC PRICING - AN EMPIRICAL-INVESTIGATION

The demand for energy and in particular the demand for oil is very sluggish. Given this dynamic description of demand, a monopoly, or a dominant cartel, may either apply a volatile or a stable price policy in order to maximize profits. In particular, earlier works of Fromholzer and Wirl derive that the shape of the equilibrium demand function determines whether a price is stable or volatile. More precisely, a concave demand relation induces a smooth, and a convex relation leads to a volatile, strategy. This theory is empirically tested for the demand for OPEC oil. © 1990.