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A RATIONALIZATION OF UPS AND DOWNS OF OIL PRICES BY SLUGGISH DEMAND, UNCERTAINTY, AND NONCONCAVITY

Authors

  • FRANZ WIRL,

    Corresponding author
    1. Department of Business Studies, Faculty of Business, Economics and Statistics, University of Vienna, Vienna, Austria
    • Corresponding author. Franz Wirl; Department of Business Studies, Faculty of Business, Economics and Statistics, University of Vienna, Brünnerstr. 72, A-1210 Vienna, Austria, e-mail: franz.wirl@univie.ac.at

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  • SEBASTIAN CABAN

    1. Faculty of Electrical Engineering and Information Technology, Institute of Telecommunications, Vienna University of Technology, Vienna, Austria
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Abstract

Motivated by the recent switching between “low” oil prices and “high” oil prices, this paper provides an economic explanation for oil price volatility. Given the characteristics of the oil market—sluggish, concave, and uncertain demand, as well as noncompetitive players—the corresponding profit maximizing strategy is to switch between a low price and a high price depending on whether the current demand is below or above a certain threshold. This provides an economic rationalization of oil price volatility (including the low prices) as alternative, or at least as complement, to the typically offered political explanations.

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