The oligopolistic market model and oil prices

September 9, 2017 Construction

Executive Summary

The study is prepared to explicate how oligopolistic market theoretical account is the best theoretical account to associate to the current addition in the monetary value of Oil. The Oil crude oil Organization is analyzed profoundly which clearly depicts the oligopoly manner of selling by the members of OPEC. It has besides examined by batch of research and based on recent studies that the OPEC attempts to act upon the oil monetary values by commanding the supply of oil production with the consent of all the members and attempts to repair the oil monetary values in order to derive heavy net incomes. OPEC works on the same regulation as followed by oligopoly market construction and therefore clearly indicates its relation to each other and is best illustration of oligopoly market manner.

Table of Contentss

Executive Summary… … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … 2

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Table of Contentss… … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … .3

1.0 Introduction… … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … .4

2.0 Discussion… … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … 4

2.1 Features of Oligopoly Market Structure… … … … … … … … … … … … … … … … … … … … … … … . 4

2.2 Kinked Style Demand curve… … … … … … … … … … … … … … … … … … … … … … … … … … … … … ..5

2.3 Industry Examples of Oligopoly… … … … … … … … … … … … … … … … … … … … … … … … … … … ..6

2.4 Introduction to OPEC… … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … 7

2.5 OPEC: Oligopolistic market theoretical account… … … … … … … … … … … … … … … … … … … … … … … … … … 8

2.6 Advantages and Disadvantages of Oligopoly Market Structure… … … … … … … … … … … ..9

3.0 Decision… … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … 9

Reference List… … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … 10

1.0 Introduction

The Oligopoly market construction is the market which has few manufacturers and big figure of purchasers which gives these manufacturers an advantage to command the market. Harmonizing to ( Scholasticus, 2010 ) , the purchasers have really less options and do non hold plenty cognition about the market. The manufacturers inflate the monetary values of their goods to pull more clients by cut downing monetary values taking to deflated monetary value level.A

Based on Pedants composing in one of its articles, the manufacturers have perfect cognition of the consumers but consumers do non hold any information about the manufacturers or their act of act uponing the monetary values has a negative consequence on national economic system.

2.0 Discussion

2.1 Features of Oligopoly Market

There are few manufacturers and big figure of purchasers.

The manufacturers deal in differentiated merchandises. ( Jayasuriya, 2011, p. 87 )

One of the manufacturer or house become the leader of the group and makes others to hold or dominates them to repair the monetary values which consequences in monetary value leading.

The competition in an Oligopoly market is intense and both monetary value and non-price methods are used to pull more clients. For illustration in batch of advertizements, manufacturers mention ”We will non be beaten on monetary value. The monetary value will be matched with the rival merchandising monetary value ” ( Labs S. S. )

In Oligopoly market, houses or manufacturers get together to portion a market and make up one’s mind on monetary values. Because of an uncompetitive market construction, they enjoy heavy net income by raising the monetary values or take downing the monetary values to pull more clients ensuing in entry barriers to this market. ( Labs S. S. )

Harmonizing to recent survey by Stanley St Labs. , the competition is really different in oligopoly as compared to other markets signifiers. In other markets, it is violent because of the high competition to derive the market portion but in oligopoly, the houses are interested to derive the market portion by join forcesing to gain heavy net incomes.

Firms are reciprocally mutualist which means if one house changes its monetary values, it will impact the gross revenues of other houses.

2.2 Kinked Style Demand Curve

Harmonizing to ( Stewart & A ; Rankin, 2008, p. 141 ) , the oligopoly market constructions have kinked demand curves and the demand curve for the merchandise has two subdivisions called inelastic and elastic subdivision.

demand curve.png

Kinked Demand Curve

The snap of demand depends on the amendments of rival companies monetary value or service end product.

The premise made here is that the all the companies would desire a considerable market portion along with heavy net incomes:

There is no addition of monetary value by one peculiar house. This is elastic demand. There would be an inauspicious impact on the entire gross of the company.

In a state of affairs where the rival company reduces it monetary values in order to keep its market portion, it would be an inelastic demand curve. Due to decrease in monetary values once more, this would impact the entire gross of the company.

The Price warsA between the houses does non profit anyone but it benefits the consumers in fact. ( ecoteacher )

Based on the above graph, we province it faces kinked manner demand curve because of these grounds:

It shows monetary value rigidness.

It controls the market section.

Leader decides the market Price and others agree to it.

It consequences in Mergers/cartels and collusion to command market.

Manufacturers decide on monetary values with the consent of others.

It has Horizontal and Vertical Integration.

2.3 Few Industry illustrations given by Economists instructors ‘ society of South Australia are:

The food market market in Australia is oligopoly which is dominated by Woolworths and Coles. They have batch of shops in Australia and have an extended distribution system across Australia. It is hard to vie with these houses as it requires immense investing to derive the sort of market portion as they have.

The Automobile Industry is a signifier of oligopoly market.

The universe Oil production market or Oil refinement is besides another oligopoly dominated by the ”seven sisters ” transnational oil companies like BP, Shell, and Exxon.

The telecommunications market in Australia was ab initio aA monopoly but as new telecom service suppliers started operating, it resulted in a group of few elephantine telecom suppliers viing for a greater market portion.

2.4 INTRODUCTION OF OPEC

Harmonizing to the OPEC Organization, OPEC is the intergovernmental organisation ( Organization of the Petroleum Exporting Countries ) consisting of 12 oil bring forthing and exporting states across America, Asia and Africa continents. The members are Algeria, Angola, Ecuador, the Islamic Republic of Iran, Iraq, Kuwait, the Socialist People ‘s Libyan Arab Jamahiriya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates & A ; Venezuela. ( About Opec, 2011 )

A study ( OPEC organisation, 2011 ) states that it was formed on September 14, 1960 in Baghdad, Iraq, by five Founder Members: Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. It was registered with the United Nations Secretariat on November 6, 1962 ( UN Resolution No 6363 ) .

OPEC organisation ( 2011 ) indicates their chief aims as:

To develop and keep the crude oil policies for the Members Countries to safeguard their involvements.

To guarantee the stableness of the monetary values in the international oil markets to extinguish the unneeded monetary value fluctuations

To supply a regular supply of crude oil to the states while anticipating a just return on the crude oil industry investing.

2.5 OPEC: Oligopolistic market theoretical account

TheA Organisation of Petroleum Exporting CountriesA orA OPECA is an oligopoly market which is dominated by the Arab oil manufacturers as they hold the maximal sum of oil refineries which gives them an chance to rule others and make up one’s mind on monetary values. Cartel is another name for an oligopoly of manufacturers of a trade good. ( About Opec, 2011 )

The Members of OPEC attempts to act upon the universe oil monetary values with the consent of all and they set the production quotas and go an effectiveA cartelA by curtailing the gross revenues. They deeply analyse the current market state of affairs and anticipate future demand and supply to see assorted fluctuations of monetary values in the markets. After analyzing the market scenario, they decide to raise or take down the oil production as agreed by all the members to keep monetary value stableness and do the oil available for ingestion. ( corporation, 2003-2011 )

Harmonizing to ( Oil: Crisis and Collusion, 2011 ) , OPEC was organized with the intent of pull stringsing the oil monetary values by commanding oil supplies to the market.

It controls about 80 % of the universe ‘s oil militias and 40 % of the universe ‘s production among their 12 member provinces. As discussed earlier, it is dominated by Gulf States who can easy turn the lights-outs on and off when required to act upon the market monetary values. Even when the economic system was confronting an issue of recession, it did non hold any consequence on oil industry and were still doing heavy net incomes.

Therefore, we can state that OPEC does play an of import function in doing determination of oil supply to the market which may impact the oil monetary values in a greater extent. The members have larger figure of oil militias and can increase or diminish the production or supply whenever they want. As they really good cognize that all the development and developed states wants oil and has about become the necessity of life like nutrient in today ‘s life style, so they try to gain every bit much as they can by commanding the monetary values with the sort of power they hold in their custodies.

However, we may state that OPEC has oil militias and can non bring forth more oil as they do non hold any more oil militias as overestimated by us. There can be batch of other grounds as good which may give rise to the oil monetary values like any trade good monetary value fluctuation due to the demand and supply consequence. ( Savage, 2008 )

2.6 Advantages and Disadvantages of Oligopoly Market Structure

The cost of a service of merchandise in under oligopolistic tend to be lower in comparing to that of a monopolistic house, but more than a competitory market. There is stableness in pricing ; nevertheless the monetary values would take to decrease if any other house reduces. This will impact the profitableness of the companies giving a benefit to the client.

As there are barriers to fall in oligopolies, it gives the houses cost advantages. This is because they would provide to mass production. Consequently it encourages holding extremely competitory production processes which than improvises the service bringing.

( William Boyes, 2008 )

3.0 Decision

To reason, we can state that OPEC is an oligopoly signifier of market construction where few states who have oil militias decide on the current production and supply of oil with each other consent which straight influences the monetary value of oil. Hence, oligopolistic market construction theoretical account explains the behavior of oil industry and its effects on the market monetary values. In a recent study ( corporation, 2003-2011 ) states that United States, Canada, Mexico, Russia and China besides produces oil and are expected to cut down the demand for gasolene in future through its improved techniques and research and development in other signifiers of energy which will besides cut down the affect of laterality of OPEC on the monetary value of oil.

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