...potential actions of the Organization of Petroleum Exporting Countries, or OPEC. The purpose of this paper is to discuss the difference between a monopoly, an oligopoly, and a cartel along with examples of each. It will discuss the welfare effects of monopolies and oligopolies. It will discuss how game theory explains the relations of firms within oligopolies and cartels and the financial purpose of OPEC and the past five years of the oil prices. Economics for the Global Manager The Organization of Petroleum Exporting Countries, or OPEC, economic structure and future actions are predicated on a contract from an economic firm. The difference between a monopoly, an oligopoly, and a cartel are simple and examples of each will be given. The welfare effects of monopolies and oligopolies will be discussed. Game theory explains the relations of firms within oligopolies and cartels. The economic purpose of OPEC and what has happened to oil prices over the past five year will be discussed. Differences /Examples One seller of a good or service which has no close substitute and has substantial control over the price and protection from rivalry through a barrier to entry is a monopoly. An industry that has moderately diminutive number of firms, barriers to access, price searching behavior and mutual interdependence is an oligopoly. A cartel has an arrangement between participating firms to allow coordination of their output and pricing decision to earn monopoly profits (Gregory, 2004)...
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...oligopoly An oligopoly is a market dominated by a few large suppliers. The degree of market concentration is very high (i.e. a large % of the market is taken up by the leading firms). Firms within an oligopoly produce branded products (advertising and marketing is an important feature of competition within such markets) and there are also barriers to entry. Another important characteristic of an oligopoly is interdependence between firms. This means that each firm must take into account the likely reactions of other firms in the market when making pricing and investment decisions. This creates uncertainty in such markets - which economists seek to model through the use of game theory. Economics is much like a game in which the players anticipate one another's moves. Game theory may be applied in situations in which decision makers must take into account the reasoning of other decision makers. It has been used, for example, to determine the formation of political coalitions or business conglomerates, the optimum price at which to sell products or services, the best site for a manufacturing plant, and even the behaviour of certain species in the struggle for survival. Adapted from Brittanica The ongoing interdependence between businesses can lead to implicit and explicit collusion between the major firms in the market. Collusion occurs when businesses agree to act as if they were in a monopoly position. KEY FEATURES OF OLIGOPOLY * A few firms selling similar product *...
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...is simply the area of the shaded rectangle. An oligopoly is a market dominated by a few producers. The market can be international, national, or local. The main characteristic of an oligopoly is that they have pricing power. However, unlike a monopoly that consists of a single firm dominating the market, an oligopolistic firm must take into consideration how the other producers will react to any changes in price. It is this mutual interdependence of the few firms producing the product that make an oligopoly different from a monopoly. Sometimes, an oligopoly will try to increase its market power by forming a cartel, which is a group of firms acting in unison. An oligopolistic firm is generally a large firm that had to invest a lot of capital to produce the product, such as aircraft, cars, and household appliances. This large initial investment of capital is often a major barrier to entry to oligopolistic markets. Other barriers to entry include patents, control of strategic resources, and the ability to engage in retaliatory pricing to prevent firms from entering the market. An oligopoly produces products that exhibit large economies of scale, where the cost of producing each unit declines with large quantities. Such economies of scale prevent other firms from entering the market, since there would be little market share that could be gained, and what could be gained would not be enough to be profitable. An oligopoly can produce either...
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...Oligopoly * An oligopoly is a form of industry (market) structure characterized by a few dominant firms. Products may be homogeneous or differentiated. * The behavior of any one firm in an oligopoly depends to a great extent on the behavior of others Oligopoly Models * All kinds of oligopoly have one thing in common: * The behavior of any given oligopolistic firm depends on the behavior of the other firms in the industry comprising the oligopoly. The Collusion Model * A group of firms that gets together and makes price and output decisions jointly is called a cartel. * Collusion occurs when price- and quantity-fixing agreements are explicit. * Tacit collusion occurs when firms end up fixing price without a specific agreement, or when agreements are implicit. The Cournot Model * The Cournot model is a model of a two-firm industry (duopoly) in which a series of output-adjustment decisions leads to a final level of output between the output that would prevail if the market were organized competitively and the output that would be set by a monopoly. The Kinked Demand Curve Model * The kinked demand model is a model of oligopoly in which the demand curve facing each individual firm has a “kink” in it. The kink follows from the assumption that competitive firms will follow if a single firm cuts price but will not follow if a single firm raises price. The Kinked Demand Curve Model * Above P*, an increase in price...
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...What is a monopoly? A monopoly is an enterprise that is the only seller of a good service. In the absence of government intervention, a monopoly is free to set any price it chooses and will usually set the price that yields the largest possible profit. (Stigler, 2013) What is an Oligopoly? Oligopoly is an industry can only have a handful of large firms; it makes it very difficult for new firms to enter into the industry. The firm products can be similar or different, but the action of one firm will impact others in the oligopoly. (Wessels, 2000) What is a Cartel? A Cartel is a group of firms in an oligopoly that get together and agree to cooperate to the detriment of consumers and other firms. The benefit of cooperation is that the oligopolists can charge higher prices to consumer end up with less than they otherwise might have consumed. (Wessels, 2000) Example of a Monopoly: Examples of monopolies includes Microsoft and Windows, DeBeers and diamond, your local natural gas company. Individual restaurants and other products that enjoy brand loyalty in otherwise competitive markets will choose prices and output just like monopolists do. (Monopoly) Phone companies are an example of the breakup of a firm with monopoly power. AT&T was forced to break into a number of local phone companies back in 1982, with several regional operating companies such as bell south etc. Today, AT&T and Verizon control most of the...
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...statements associated with this question are correct Answer: B 5. In the long-run, monopolistically competitive firms: A. Charge prices equal to marginal cost B. Have excess capacity C. Produce at the minimum of average total cost D. Have excess capacity and produce at the minimum of average total cost Answer: B 6. If a monopolistically competitive firm's marginal cost increases, then in order to maximize profits the firm will A. Reduce output and increase price B. Increase output and decrease price C. Increase both output and price D. Reduce both output and price Answer: 7. Which of the following market structures would you expect to yield the greatest product variety? A. Monopoly B. Monopolistic Competition C. Bertrand Oligopoly D. Perfect Competition Answer: 8. The primary difference between Monopolistic Competition and Perfect Competition is A. The ease of entry and exit into the industry B. The number of firms in the market C. All of the statements associated with this question are correct D. None of the statements associated with this question are...
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...Differences in the Market Structures In economics there are four main market structures: perfect competition, monopoly, monopolistic competition, and oligopoly. Each of these market structures faces the common factor of competition. Various degrees of competition are what separate these market structures. Secondly, the commodity or product plays a huge role in these market structures because some products have substitutes or identical products. Lastly, we will observe the barriers to which a firms face when entering or exiting the market. This is a very important factor in the market structures because relative difficulty in entry and exit of the markets will determine what type of market structure we are examining. Market structures are based on two extremes known as perfect competition and monopoly. Oligopolies lie in the middle of this spectrum. A comparison and contrast of each market structure in short term and long term scenarios will be detailed in the following paper. Perfect competition and Monopoly In a Perfect competition there are four conditions that characterize the perfect competition structure: a large number of buyers & sellers, free entry & exit, product homogeneity, and perfect information. Each of these aspects is compared when examining the differences between monopoly and perfect competition. First in perfect competition there are a large number of small firms. Perfectly competitive firms’ demand curves are perfectly elastic while a monopoly’s...
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...this report outlines the key features and characteristics of an oligopolistic market structure. An oligopoly market structure can be differentiated from others because it has distinct features such as competition among a few firms, high concentration ratio and barriers to entry, non price competition, differentiated products and high level of interdependence between firms. The report also outlines and describes why the UK detergent industry which is dominated by a few firms reflects the model of an oligopoly. Several real life examples have been used to confirm the theory of oligopoly. Moreover, the price rigidity observed in an oligopolistic industry has been explained by the kind demand curve theory. The second section of the report examines the case of price fixing by Procter & Gamble, Unilever and Henkel, who are major players in the detergent industry in Europe. It relates the concept of collusion and how it has led the firms to price fixing arrangements in the detergent industry. Finally the economic rationale why Henkel was not fined by the European Competition Commission has been discussed. Market structures may be generally categorised as the following: perfect competition, monopoly, oligopoly or monopolistic competition. These different types of market structures can be differentiated mainly by the number of competitors in a market and their market share. An oligopoly is a form of market structure that has few sellers that dominate the industry and they tend to sell...
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...Oligopoly in business can be described as when few firms between them share a large proportion of the industry. In the essay I will examine the economics literature on tacit collusion in oligopoly and why firms are tempted to collude. I will provide benefit of collusion and legal literature regarding collusion. Some of the best know companies are oligopolists, including Coca-Cola, Pepsi, British Airways, and Virgin Atlantic Airways. There are however, significant difference in the structure of industries under oligopoly, and similar significant difference in the behaviour of firms. The firms may also produce a virtually identical product. Most oligopolists produce differentiated products such as (e.g. cars, drinks). Much of the competition between such oligopolists is in term of the marketing of their particular brands (Sloman, Hinde, Garratt: 2010). Despite the difference between oligopolies, there are two crucial features that distinguish oligopoly from other market structures. There are various barriers to the entry of new firms because it requires a lot of capital to start, however entry barriers vary from industry to industry. Also, because there are only few firms under oligopoly, each firm will have to take into account of the others; this means that they are mutually dependent. Oligopolies do not compete on prices. Price wars tend to lead to lower profits, leaving a little change to market shares. Furthermore, Oligopolies firms tend to charge reasonably premium prices...
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...firm in the market”. (Thomas, Maurice 2010, p. 561). An oligopoly is described in the book as a “few relatively large firms, each with a substantial share of the market and all recognize their interdependence.” (Thomas, Maurice 2010, p. 512). Meaning, direct competitors understand their internal decisions will affect not only their profits and placement in the market, but also greatly their competitors. Price cutting or expensive advertisement plans will affect the firm’s profit margins, but also with strategically place the competing firm in a position to react. Even in small towns or multiple businesses in the same industries from restaurants to retail, need to be aware of how their decisions affect their own business, but also their market. Decisions should be systematically made and will economically affect a business along with the anticipation of competitor’s reaction to their precise move. Oligopolies are everywhere and can be detected from wheat that is managed by large agriculture groups to cell phone companies. Oligopolies How do firms in the industry compete? Managers within interdependent industries make decisions that will affect not only their firm, but they must consider the reaction to their competitor as well. Without this consideration, the rival’s reaction will certainly affect his or her own sales and profitability due to that decision, which may or may not be intended. An oligopoly can be formed when a selected few companies dominate a market...
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...THE IIS UNIVERSITY JAIPUR Indian Airlines- an oligopoly INDEX ACKNOWLEDGEMENT WHAT IS OLIGOPOLY? An oligopoly is a market form in which a market or industry is dominated by a small number of sellers (oligopolists). Oligopolies can result from various forms of collusion which reduce competition and lead to higher prices for consumers. Oligopoly has its own market structure.[1] With few sellers, each oligopolist is likely to be aware of the actions of the others. According to game theory, the decisions of one firm therefore influence and are influenced by decisions of other firms. Strategic planning by oligopolists needs to take into account the likely responses of the other market participants. The major characteristics of a market proving it to be an oligopoly are:- 1. Profit maximization conditions An oligopoly maximizes profits. 2. Ability to set price Oligopolies are price setters rather than price takers. 3. Entry and exit Barriers to entry are high. The most important barriers are government licenses, economies of scale, patents, access to expensive and complex technology, and strategic actions by incumbent firms designed to discourage or destroy nascent firms. Additional sources of barriers to entry often result from government regulation favoring existing firms making it difficult for new firms to enter the market. 4. Number of firms "Few" – a "handful" of sellers.[3] There are so few firms that the actions of one firm can influence...
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...this report outlines the key features and characteristics of an oligopolistic market structure. An oligopoly market structure can be differentiated from others because it has distinct features such as competition among a few firms, high concentration ratio and barriers to entry, non price competition, differentiated products and high level of interdependence between firms. The report also outlines and describes why the UK detergent industry which is dominated by a few firms reflects the model of an oligopoly. Several real life examples have been used to confirm the theory of oligopoly. Moreover, the price rigidity observed in an oligopolistic industry has been explained by the kind demand curve theory. The second section of the report examines the case of price fixing by Procter & Gamble, Unilever and Henkel, who are major players in the detergent industry in Europe. It relates the concept of collusion and how it has led the firms to price fixing arrangements in the detergent industry. Finally the economic rationale why Henkel was not fined by the European Competition Commission has been discussed. Market structures may be generally categorised as the following: perfect competition, monopoly, oligopoly or monopolistic competition. These different types of market structures can be differentiated mainly by the number of competitors in a market and their market share. An oligopoly is a form of market structure that has few sellers that dominate the industry and they tend to sell...
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...3.0 Introduction to Monopolistic & Oligopoly Competition In today’s business context, firms facing numerous challengers when considering enter into different market segments. Monopolistic competition is a market structure where varieties of firms compete in a marketplace by providing differentiated products (Kumar and Chatterjee, 2015). Besides, an oligopoly competition involved the domination of a few firms in the market where producers offer homogeneous or differentiated product to a large number of consumers (Wen and David, 2001). 3.1 Characteristic of Monopolistic Competition Monopolistic competition is characterized by many sellers in the market; involving numerous independent firms competing in the market lead to a high degree of competition. On the other hand,...
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...Why are oligopolies tempted to collude? Stephen (2007) and Stuart (2007) have identified that oligopoly refers to a situation where a few dominate the market, often producing a large number of branded products. And, Kevin, (2005) states that it is defined as the situation in which the number of firms is sufficiently small for the action of a single firm to be able to influence the market. In this essay, I am going to talk about why are oligopolies tempted to collude, give some example and theory to prove it. Undoubtedly, there are some features of oligopolies. It exists when there are only a few dominating sellers, each of them occupies a significant share of the market. For example, major airlines like British Airways and Air France operate their routes with only a few close competitors, but there are also many small airlines catering for the holidaymaker or offering specialist services. Besides, it is difficult for new forms to enter to the market. As the existing firms are well-established and have already benefited from economies of scale, so the new firms have to pay high cost to compete with them. Also, the market information is imperfect so that no one can know all the market information such as price, quality and quantity, etc. Furthermore, Carol et al, (2007) writes that oligopolists often use non- price competition, they differentiated services and marketing campaigns are used to boost sales, such as advertising and offering free gifts to distinguish their products...
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...because they are numerous, variety of choices, and no single entity has much power over prices. The health insurance can be considered as rapid growth industry. Recently, this industry is transforming in a rapid way and evolving into an oligopoly. Insurance markets in many states are eventually controlled and dominated by a few large firms. There were more than five hundred health insurers involved mergers between 1998 and 2008 (Bakhtiari, 2010). Although there are hundreds of small insurance companies operating in the market, the industry Led by WellPoint, 12 health plans cover two-thirds of the enrollment in the U.S. commercial-insurance market (Bloomberg News, 2010). An analyst's report cited in the article predicts there will be 100 insurers with around 200,000 members could be forced out of business. Smaller insurers are increasingly unable to invest in the infrastructure and technology to effectively manage care (Bakhtiari, 2010). However, mergers have been the main power rather than small insurers going out of business. 2. Hypothesize the basic short-run and long-run behaviors of the model in the industry you have chosen in a “market economy” This paper uses Kinked-Demand theory of oligopoly; there is no single theory that explains oligopoly behavior. The kinked demand model assumes that if one firm raises the prices, other firms will not follow to increase. If the firm reduces its price, it is assumed that its competitors will follow suit and reduce their prices as well...
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