Abstract
The hypothesis of the price reaction function‐prices change in dependence of capacity utilization‐is frequently applied to model OPEC's response to world oil market conditions. These studies assume implicitly myopic consumer behavior, or more bluntly, only the “experts” know this model but not the consumers. This paper extends the analysis to rational expectations (more precisely, perfect foresight due to a deterministic framework) and proves the (saddlepoint) stability of the equilibrium. Numerical examples highlight the differences of the two hypotheses, myopic versus rational consumer expectations. In particular, damped oscillations result for the empirical application (larger and more persistent for myopic consumers), which explains past volatility.
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