Cartel-versus-Fringe Models

This article reviews the literature on the cartel-versus-fringe model. Although it has a wide range of potential applications, the cartel-versus-fringe model is particularly used to describe the oil market, where there is a coherent cartel (OPEC) and a large number of small suppliers. The latter can be considered as price takers. Several types of equilibrium concepts are discussed and their outcomes are fully characterized for the case of linear demand and constant marginal extraction costs.In a Nash equilibrium, the cartel takes the supply path by the fringe as given, and determines its own optimal extraction path, either committing itself to the path from the outset (open-loop) or conditioning its actions at each instant of time on the history of the resource stocks (closed-loop). In a Stackelberg equilibrium (open-loop and closed-loop), the cartel takes into account the optimization rule followed by the fringe members. The issue of dynamic inconsistency that may occur in the open-loop Stackelberg equilibrium is discussed