Escaping the tolerance trap

In order to examine the implications of the weakening of OPEC's responsiveness in adjusting its production levels, this paper explicitly incorporates rigidity in the quantity adjustment mechanism, thereby extending previous research which assumed smooth quantity adjustments. The rigidity is manifested in a tolerance range for the discrepancy between the declared target price and that of the market. This environment gives rise to a 'tolerance trap' which impedes the convergence process and inevitably brings the market to a standstill before its reaches the targeted price and revenue objectives. OPEC's reaction to the standstill has important implications for the achievement of the target-based equilibrium and for the potential collapse of the market price. This paper examines OPEC's policy options in the tolerance trap and reveals that the optional policy in order to break this impasse and move closer to the equilibrium point is gradually to reduce output and not to flood the market. (Author)