The chief focal point in this essay is to explicate the feature of the Oligopoly Market Model and explicate how the kineticss of the Oligopolistic market can act upon the monetary value of a merchandise and different schemes used by houses together to make an inelastic demand for the merchandise to optimise net incomes
The 2nd portion of the essay dressed ores on how OPEC as organisations has control on the universe ‘s Oil monetary values. Different scenarios are enumerated in the undermentioned study, where OPEC has used schemes to command the market and capitalized on the Oligopoly theoretical account
Table of Contentss
Microeconomicss entails the economic activity of consumers, manufacturers or group of manufacturers and consumers and the market in which they interact. It is survey of purchasers, Sellerss, monetary values and net incomes. Market economic system refers to the developed and the industrialised economic systems in the universe. Market economic system is in which people specialize in the production of array of goods and services and run into their nutrient and stuff demands through exchange. ( Simley )
Market economiesA can change based on the supply and demand and it is the best deciding to analyse the Market. While most of the developed states can be classed as holding a assorted economic systems because they allow market forces to drive most of their activities like the authorities interactions in order to supply stableness
There are a figure of market constructions like: Perfect Competition Model ; Monopolistic Model ; Monopoly and Oligopoly with each holding their ain features for the economic experts to understand why each concern behaves otherwise in that market. However the aim of this assignment is to understand what happens in Oligopoly market construction.
The latter portion of the assignment, we are traveling to analyse how the OPEC is moving as oligopoly in the crude oil industry and the impact it has on the oil monetary values and how it has impacted the economic system of the universe.
2.0 Features of the Oligopoly Market Model
An oligopoly is a market dominated by a few manufacturers, each of them has control over the market. The word ‘Oligopoly ‘ is derived from Grecian words oligio, intending ‘few ‘ and polein, intending ‘to sell ‘ . The few taking dominant houses have a high degree of market concentration in the Oligopoly construction. Oligopoly is best defined by the behaviour of the houses within a market than its market construction. Generally an oligopoly exists when the few prima houses have about 60 % of the market portion and when the demand is inelastic and histories for the maximal gross revenues.
2.1 Main characteristics of an oligopoly
Although there is no definite method to foretell how houses determine the monetary value and the end product in Oligopoly, but by and large an oligopoly exhibits the undermentioned characteristics:
Merchandise stigmatization: Each house in the market sells a differentiated merchandise and has its ain niche in the market.
Entry barriers: There are important entry barriers for smaller houses in an oligopoly market, which prevents the dilution of competition in the long tally and maintain enomorous sum of supranormal net incomes for the dominant houses. Smaller houses by and large operate on the fringe of the market, but is non important adequate to do the impact on end product and market monetary values.
Interdependent decision-making: Dominant houses collude with each other and find the monetary value and taken into history the reaction of their challengers to alter in market monetary value or end product
Non-price competition: Non-price competitions are a consistent feature of the competitory schemes of oligopolistic houses.
2.2 Types of oligopoly
There are two types of Oligopoly viz. conniving and un conniving oligopoly. In conniving oligopoly, Firms straight collude with each other and signifiers trusts to hold a control on the market monetary value. In Tacit collusion, houses have a common apprehension to cut out competition. Price leading is where the dominant house has the power tro change the monetary value and so the remainder of the market follows suit. In un-collusive oligopoly Game Theory is used where the house makes a strategic determination to either do immediate net incomes or destruct the challengers market portion, which in bend has a immense consequence on the market.
2.3 Pictorial representation of a house and the Market in an Oligopoly
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2.4 The Kinked Demand Curve Theory:
Paul Sweezy, an American, developed the Kinked Demand Curve Theory in the late thirtiess. Normally in an oligopoly market the houses are in consensus to keep a criterion and changeless monetary value of the merchandise, which creates inelastic demand and generates supranormal net incomes. If a house decides to increase its monetary value, without conspiring or join forcesing with the other dominant houses, the other houses in the market decides retain the same monetary value. In this instance the house that has increased the monetary value will shortly lose its market portion and a considerable sum of gross. On the other manus, if that house in the oligopoly market decides to take down its monetary value, the other houses in the industry excessively will hold to make the same to retain their market portion and so all houses will lose its gross. It is so better to stay at a changeless monetary value to avoid losing gross or market portion. This is what Price Rigidity means. If there is a alteration in the monetary value, the demand curve will crimp around the predominating market monetary value as it will undergo farther stabilisation of the monetary value when the houses will take attention of the alterations in the cost. In the figure shown below, the MR curve is discontinuous because at ‘a____b ‘ there will be no alteration in demand as the production and the monetary value is the same. When the cost additions, the fringy cost curve moves upward from MC 1 to MC 2 and the demand curve cricks. Thus the house can maximise net income merely at monetary value P and measure Q.
Dollars per unit
The kinked demand curve theoretical account predicts periods of comparative monetary value stableness under an oligopoly and concerns will concentrate on non-price competition to reenforce their market place and to hike gross revenues, grosss and net income.
2.5 Aspects of Non-price competition schemes
Non-price selling schemes have two separate facets:
Product distinction scheme is used by houses to convert the purchasers their merchandises are different from those of rivals.
Product fluctuation scheme involves in making minimum fluctuation to the merchandise to pull purchasers
Non-price competition besides involves immense sum of advertisement and selling schemes like particular packaging, promotional events, sponsorship, holding a Brand embassador for the merchandise, which will hike the trade name image to pull demand and generate trade name trueness among consumers.
2.6 Price leading
Many economic experts, such as Stigler ( 1947b ) , Bain ( 1960 ) have described assorted type of monetary value leading. These have been classified by Scherer ( 1970 ) into three types: dominant, conniving and barometric monetary value leading. The dominant type is considered to depict where the dominant houses, which are larger in size and has the major ball of market portion establishes the monetary value leading place and the other minor houses being the followings. In the conniving type, the chief houses set monetary values, which are so followed by the other minor houses and the monetary value degree is instead monopolistic than competitory. Scherer ( 1970 p170 ) has stated that the monetary value leaders temper their monetary value policies in order to stamp down intra – industry conflicts in this instance. Finally in the Barometric monetary value leading the monetary value is set around the competitory degree ( Ono, Y. ( n.d. ) . Price Leadership: A theortical Analysis. In Economica ( pp. 49, 11-20 ) . Musashi University ) .
2.7 Explicit collusion under oligopoly ( Behaviour of a Cartel )
In the conniving Price leading, in order to control market uncertainness, dominant houses engage in some signifier of conniving behavior and make up one’s mind to prosecute in monetary value repair understandings or trusts. The purpose of this is to maximize joint net incomes.This behavior is considered as illegal by the UK and European competition governments.
Collusion is frequently deemed as a desire to accomplish joint-profit maximization within a market, to command supply and to forestall monetary value fluctuations in an industry.
It can be concluded that trust as a whole is maximizing net incomes, but the single house ‘s end product is improbable to be at their net income maximising point and if any of the houses breaks their understanding with the trust, there will be extra supply in the market and crisp diminution in the monetary value.
Collusion in industry is easier to accomplish when:
There are merely a little figure of houses in the industry.
Entry barriers are protected by larger houses
Demand is reasonably inelastic in monetary value and the market demand is non excessively variable
End product of the houses in the trust is easy monitored and to maintain a control on the entire supply and it will be easy to place if any of the houses are seeking to rip off on their end product quota
Most cartel agreements experience troubles and tensenesss among them and some manufacturer trusts prostration wholly. There are several factors that can make jobs within a conniving understanding between providers:
Falling market demand during a lag or recession puts force per unit area on single houses to cut down monetary values to derive net incomes or least maintain their gross.
Exposure of illegal monetary value repairing by market regulators
Vested involvement: The house in the trust aims finds it profitable to raise its ain production to derive more net incomes and non adhere to the trust end product quotas. Disputes among the trust how to portion out the net incomes. ( Riley, 2006 )
3.0 Analysis on OPEC ‘s scheme
3.1 OPEC and its aims
The Organization of the Petroleum Exporting Countries ( OPEC ) is a intergovernmental organisation, dwelling of 12 oil bring forthing and exporting states. 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.
The organisation ‘s chief aims are:
To unite the policies of crude oil among the Member states in order to safeguard their single and corporate involvement ;
To avoid monetary value fluctuations and to guarantee stableness around of oil monetary values in the international markets ; and
To supply an efficient economic and regular supply of crude oil to the universe and guaranting just returns to the 1s that are puting in the crude oil industry.
3.2 Report done by Jim Saxton on how OPEC as trust manipulates the World ‘s oil market.
The OPEC trust has strategically maintained to maintain high monetary value in an oil market under force per unit area from lifting demand. It has encountered short tally capacity restraints in the past, but OPEC did non increase its oil end product or convey the monetary value to a lower manageable degree. On the contrary OPEC cut the oil end product intermittently, this behaviour is to prove the bound of the market and what can it bear in footings of monetary value addition.
Hence monetary value volatility does non connote failing of the trust, it is a strategic determination made by the trust to optimise on supranormal net incomes. Even though oil gross more than tripled from $ 183 billion in 2002 to $ 580 billion in 2006, the trust increased its oil end product merely by a mere 17 per centum and increased its monetary value from $ 22.00 to $ 28.00 per barrel.
In pattern, if houses decide to monopolise bing beginnings of supply, they can non command the monetary value, because they do non command demand and the chance of market entry by challengers is high. High monetary values will bring on lesser demand and lesser ingestion and purchasers will seek to alternative inputs, therefore doing the entry of the competition into the market higher. A dominant manufacturer or provider has a pick to either harvest net incomes in the short tally by blow uping monetary value at the disbursal of losing its laterality in the hereafter, or it can make up one’s mind to bear down a moderate monetary value that sustains its market place and generates supra-competitive net incomes over clip. Until the terminal of 2003, OPEC pursued this scheme with an expressed monetary value set of $ 22 to $ 28 per barrel.
Get downing in 2004, the demand for oil showed a crisp addition particularly from developing states like China and advanced economic systems proved more resilient to lifting oil monetary values than antecedently believed, which induced inelastic demand for oil, which proved to be vastly good for OPEC. In add-on, the cost of other viing beginnings of oil are extortionately high. For illustration, the non-conventional Canadian oil sands-a turning market entrant was capable to much higher production costs than Alaskan or Mexican oil when it was foremost developed in the early 1970 ‘s. Therefore all these as altering market conditions gave a encouragement to OPEC scheme and strengthened its place. OPEC abandoned its proclaimed monetary value mark scope of $ 22.00 – $ 28.00 per barrel and put off puting a new one. It was clear that OPEC believes that a higher monetary value had become sustainable. OPEC offers largely cliches when monetary value rushs but intervenes resolutely when short-run forces push it back.
The trust ‘s true strength lies in keeping back a inundation of inexpensive oil. OPEC holds most of the universe ‘s oil militias and has highly low production costs OPEC members costs within the Persian Gulf have costs of less than $ 5 per barrel, and OPEC member costs outside the Persian Gulf norm less than $ 9 per barrel. OPEC ‘s portion of conventional oil militias is 80 per centum and 70 per centum if Canadian oil littorals are included. Since 1977, the oil supply in the remainder of the universe has increased from 32.2 to 50.7 million b/d. OPEC ‘s oil end product today is hardly more than in 1977, even though it could easy bore more Wellss. In all of the Middle East, there are 11,948 bring forthing oil Wellss, which is fewer than the figure found in Brazil, 11,995.3 OPEC ‘s portion of the oil market was 52 per centum in 1973, reached a depression of 29 per centum in 1985, and since 1994 has been about 40 per centum. The unreal scarceness created by the trust shifts the market ‘s concentrate off from cost and to the trust ‘s expected end product behaviors of non pull offing outlooks. When the trust fails to direct clear and dependable signals, guess and fudging schemes arise. Oil purchasers build precautional stock lists supplemented by authoritiess ( e.g. , the Strategic Petroleum Reserve ) , the usage of fiscal fudging instruments additions and raising credibleness issues on OPEC ‘s purposes.
Over the decennaries, OPEC has succeeded in cutting down its oil substructure investings and keeping back immense shops of inexpensive oil. It has in the past made tremendous net income borders as a consequence. The higher the border is, the harder it is to command the monetary value. OPEC can take to be a monetary value leader by denoting a moderate long-run monetary value scope and systematically spread outing its oil end product to stabilise the market. But alternatively it has decided to put that scheme aside and alternatively, the trust has opted to prosecute high monetary values and derive higher net incomes, which exceeds given in the current state of affairs. The trust may overact its manus in the hereafter. Market and the competing of supply may be more antiphonal to high and volatile monetary values in future than what OPEC expects, doing the oil monetary value to worsen and OPEC losing its market leading
( Saxton, Februray 2007 )
4.0 Excerpt from NZ herald – Sheikh Yamani warns OPEC that its scheme is short sighted
5.0 Recent developments on OPEC ‘s base in oil monetary value volatility due to the agitation in the Middle
East and the African part
Arab unrest will be a trial for OPEC
The unrest in the Arab states will prove the bounds of the Organization of the Petroleum Exporting Countries. Although the oil trust has adequate trim capacity to get by with breaks in Libya, but the quality of rough oil differs and there the possibility of supply being squeezed is higher if other member states were to come under any menace.
OPEC has 5 million barrels p/day of trim capacity, largely from Saudi Arabia. Furthermore the members of the International Energy Agency have sufficient stock hemorrhoids to pump an excess 2 million barrels a twenty-four hours for two old ages if necessary.
These militias are sufficient plenty to cover the entire closure in Libya. Libya produces about 1.6 million barrels per twenty-four hours, which is tantamount to 2 per centum of the planetary end product. If Egypt, Tunisia and Yemen had to halt their production at the same clip, the entire loss to universe oil end product will be merely to 2.7 million barrels per twenty-four hours.
Revolutions and public violences in these states have led to manageable break. Oil above $ 110 per barrel suggests markets pricing is in farther turbulence. Turmoil in Algeria, will further impact with 1.8 million barrels per twenty-four hours and if unrest spreads to Saudi Arabia, which accounts for about 12 per centum of planetary oil production, so it will be a major concern.
Libya high quality petroleum can non be replaced with supplies from other OPEC members. States in Asia with little reserves may besides experience the deficit in supply, which affirms in the long tally, oil-dependent states can non pull off with the supplies ( Galani, 2011 ) .
Can non command oil monetary values beyond $ 120 says OPEC
Paris, April 06, 2011
OPEC has small control on the oil monetary values, driven by speculators wagering on “ worst instance scenarios ” and has already supplied the market with the oil it needs, members of the manufacturer group said on Wednesday.
Oil on Wednesday traded above $ 122 a barrel for Brent petroleum, near two half-and-a-half twelvemonth highs set this hebdomad. “ There is small we can make in footings of monetary value control, ” UAE oil curate Mohammed bin Dhaen al-Hamli told an oil conference in Paris. Already, he said, the Organization of the Petroleum Exporting Countries ( OPEC ) had increased its end product in response to the break of supply from OPEC member Libya.
The group, which supplies around a 3rd of the universe ‘s oil, has resisted calls for an exigency meeting before its following scheduled conference in June this twelvemonth in Vienna. “ International markets are taking to disregard market basicss and wager on the worse instance scenarios, ” Hamli said, adding the market was well-supplied.
Iraq ‘s deputy Prime Minister for energy personal businesss Hussain al-Shahristani, a former oil curate, agreed OPEC said it had done all it could to quiet the current state of affairs. “ All that OPEC can make is to supply the market with the oil it needs and it is making that, ” he said. So far he said there was no mark in monetary values had damaged economic growing and he said he did non expect the current mass meeting would be followed by a clang as happened in 2008.
Back in 2008 monetary values reached an all-time high of about $ 150 a barrel in July, before fall ining to less than $ 40 in December as a fiscal crisis sparked in the US lodging market led to a world-wide recession.
“ We have non seen any lag in growing this clip, ” Shahristani told newsmans. ( Reuters, 2011 )
Simley, J. ( n.d. ) .
Riley, G. ( 2006, September ) . Retrieved from hypertext transfer protocol: //tutor2u.net/economics/revision-notes/a2-micro-oligopoly-overview.html
Ono, Y. ( n.d. ) . Price Leadership: A theortical Analysis. In Economica ( pp. 49, 11-20 ) . Musashi University )
Saxton, J. ( Februray 2007 ) . Opec Strategy and Oil Price Volatility. United States.
Galani, U. ( 2011, Feb 23 ) . Arab agitation will be a trial for OPEC.
Reuters. ( 2011, April 6 ) . Can non command oil monetary values beyond $ 120 says OPEC
hypertext transfer protocol: //www.opec.org/opec_web/en/press_room/178.htm