The Kinked Demand Curve and The OPEC

Would you expect the kinked demand curve to be more extreme (like a right angle) or less extreme (like a normal demand curve) if each firm in the cartel produces a near-identical product like OPEC and petroleum? What if each firm produces a somewhat different product? 

If the kinked demand curve to be a right angle, it more like a price ceiling set by the government or OPEC, which doesn't make sense since they all want to gain more profits. In an oligopolistic market, a firms' perceived demand curve is not fixed, since it keeps changing as competitors change the prices and the quantity of output. Moreover, in many oligopolist markets, it has been observed that prices tend to remain inflexible for a very long time. Even in the face of declining costs, they tend to change infrequently. In cartels like OPEC, their producers cooperating and controlling the output and price in the market to increase gains that behave like a monopoly. In this case, the demand curve becomes less extreme, which more like a normal market demand curve. 

The kinked demand curve of oligopoly assumes that response to a price increase is less than the response to a price decrease, and the elasticity of demand is perfectly elastic if price increases and perfectly inelastic if the price decreases. Although OPEC obviously knows that Oil has an inelastic demand curve, they mostly control and cooperating with reducing or increasing the output. They do not want to offer the market shares to the shale oil producers. 

Suppose each firm produces a somewhat different product, it may depend on either they are substitutes or not. If they are perfect substitutes, the price change will not seriously affect each other like they are producing identical products. Ultimately, they still have to consider the normal demand curve, since they cannot perfectly or totally control this market. 

When OPEC raised the price of oil dramatically in the mid-1970s, experts said it was unlikely that the cartel could stay together over the long term—that the incentives for individual members to cheat would become too strong. More than forty years later, OPEC still exists. Why do you think OPEC has been able to beat the odds and continue to collude? 

OPEC has acted as a monopoly for decades. They keep the price high to make higher profits. Oil has an inelastic demand curve, and this natural resource is luckily gifted to these countries. From the organization is started, they enforced cooperation through policy such as group production ceiling divided among members. Amazingly, OPEC has been successfully operating for decades, and its members are mostly oil-producing countries. 

Although OPEC has strong market power, each oil-producing country still needs that the world should have a high demand for its petroleum, and the alternative power resources are big threats. By cooperating, they may slow down the development of the substitutes. Furthermore, OPEC operates as a formal structure instead of an informal cartel who has to work behind the curtains. The structure of this organization helps the members implement more strict rules, ensuring they can trust each other, and able to supervise the overall supply. 

Reference

OpenStax College. (2016). Principles of economics. http://cnx.org/contents/69619d2b-68f0-44b0-b074-a9b2bf90b2c6@11.330

Stevens, P. (2020, April 10). OPEC and allies agree to historic 10 million barrel per day production cut. Retrieved from https://www.cnbc.com/2020/04/09/oil-jumps-ahead-of-make-or-break-opec-meeting.html

Kinked Demand Curve: Concept, Graphical Representation, Examples, etc. (2019, December 3). Retrieved from https://www.toppr.com/guides/business-economics/determination-of-prices/kinked-demand-curve/