OPEC CARTEL

Topics: Petroleum, Supply and demand, Imperfect competition Pages: 9 (3255 words) Published: October 6, 2013


“OPEC
As a
CARTEL”

There are two kinds of extreme market structure and they are perfect competition and imperfect competition. In a perfectly competitive market there are many numbers of sellers and many numbers of buyers selling and buying homogeneous products, therefore there is very little impact of a single buyer or seller changing the price of his/her product. In an imperfect competitive market there are few sellers and these sellers have some control over the prices and output of the product. Here, in this kind of market the whole market is affected by an individual changing his/her product price. In USA most of the industries fall between these two extreme market structures. But in this essay we’ll talk about oligopoly. It is imperfect competitive market state therefore here there are few no. of sellers.

Oligopoly covers many kinds of industrial behaviours and structures because of its broad nature. Oligopoly is a market condition where few numbers of sellers (oligopolists) come together and form a market or an industry. An oligopoly may have 2 firms or 20 firms, selling and producing differentiated or undifferentiated products and services. There are few participants in this market structure therefore each participant is aware about the activities of other participants. The decisions are influenced by one another. As this market is operated by few firms, the price of the product and the quantity of production is fixed by the firms itself keeping in mind their self-interest and self-respect. Sellers (oligopolists) are acting and cooperating like a monopolist – producing a small amount of quantity of goods and selling these goods at a price higher than the marginal cost. These are some of the powerful incentives at work which hinder a group of firms from maintaining the monopoly outcome.

An oligopoly is operated under imperfect competition; they follow a kinked demand curve which shows that inelasticity below the market price and elasticity above the market price, offering differentiated services and products they have strong barriers to entry. Kinked demand curve is downward sloping curve. There is a discontinuity at the bend – the “kink”. Due to this there is a discontinuity in the marginal revenue curve. The demand above the kink is relatively elastic, therefore all other firms’ prices remains unchanged and demand curve after the kink the demand will be inelastic, therefore all the firms will have similar price cut, eventually leading to a price war. The best way to overcome this problem is to produce at the point E that is the equilibrium point and, coincidently the kink point.

There are many industries in oligopoly conditions are automobile, cigarette, malt beverages (beer), small arms ammunition, oil and petroleum, etc. There are many kinds of oligopolies, a number of different oligopoly models have been structured. But we are going to further discuss about the structure of CARTEL. But before that if u examine all oligopoly models have a similar thing i.e. ‘The behaviour of any given oligopolistic firm depends on the behaviour of other firms in the industry comprising oligopoly’.

According to the traditional economic theory the producer who is at the stage of profit maximizing and also has some market power (either due to oligopoly or monopolistic competition) would have set marginal cost equal to marginal revenue i.e. MC=MR.

A cartel is an organisation of independent firms coming together, to control and limit the production and increase and decrease of price and profit. Cartels can be formed in an informal or formal manner with the agreement of every member. Cartels usually occur in an oligopolistic industry. The main aim of cartel is to increase individual profits by reducing competition. There are two kinds of cartels: Private cartels and Public cartels. In a public cartel there is involvement of government and such cartels are legally formed. Private cartels are formed by few...
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