...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). One single...
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...NAME: EZIMAH CHIDINMA MATRIC NO: 10/SMS01/020 QUESTION: DISCUSS OPEC AS A COLLUSION MARKET STRUCTURE OPEC AS A COLLUSION MARKET STRUCTRE Collusion is a characteristic trait of oligopolistic industries. Intense competition and interdependent decision making encourages oligopolistic firms to cooperate. One way to lessen the competition among an oligopolistic rival is to join forces through collusion. In general, collusion among oligopolistic firms means that two or more firms decide to act like a monopoly rather than maximizing profit for each individual firm, the firms maximize total industry profit just as if a monopoly controlled the industry. Collusion can take one of two forms: explicit collusion and implicit collusion. * Explicit collusion: it is also called overt collusion. This occurs when two or more firms in the same industry formally agree to control the market. Admittedly, because collusion in the United States and most industrialized countries is illegal, such a formal agreement is likely to be highly secret and unlikely to be documented in any way. It might involve nothing more than a casual lunch among company presidents or company decision makers skulking around back alleys in the dead of the night discussing price changes. * Implicit collusion: also termed tacit collusion. This occurs when two or more firms in the same industry informally agree to control the market, often through nothing more than interdependent actions. A prime example of implicit collusion...
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...OPEC and the economics of cartel Presented by Sanjay Gupta Lakshmi Varma Lakshmi Nair Shibin T Renjith Outlines What is OPEC? 1. 2. 3. Oil – A basic necessity OPEC (Information on OPEC) OPEC Side Line Objectives Our main premise of this Presentation is to derive economics concepts from OPEC and the economics of cartel. We will also cover briefly micro economics concepts – Demand and Supply, market structure & pricing decisions and related concepts. 2. OPEC is an epitome of Oligopoly 1. Oil – Life Blood of Indian Economy OIL - One of the life bloods of our Indian economy is oil. The impact of oil in today’s Indian economy has been witness by consumers many times. We have seen how human spending and travel got affected as the price of oil fluctuates. In contrast almost all energies are generated using oil, to mention few; Cars, Trucks, Indian railways, Plane, use oil in order to run their engine. Therefore if oil supply disturbed for one day we can imagine how the Indian economy can be affected greatly. OPEC - Introduction About OPEC (pronounced oh-peck)- Organization of the Petroleum Exporting Countries - Organization of the Petroleum Exporting Countries, established in Bagdad, Iraq in 1960. OPEC as a cartel, manipulate supply of oil in the market, in hopes of keeping prices, and profits, high. It is comprised of 12 members –Algeria, Angola, Ecuador, Islamic Republic of Iran, Iraq, Kuwait, Socialist People’s Liberian Arab...
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...OIL AND DEVELOPMENT INTRODUCTION Oil is one of the most important resource of industrialized nations. It has various uses like to generate heat, fuel vehicles, manufacturing goods like chemicals, plastics, paints, medicines etc. Oil is a non-renewable resource and thus has limited supply and due to its many uses has very high demand. Earlier price of oil was mainly influenced by OPEC. Organization of Petroleum Exporting Countries (OPEC) is type of cartel which mainly determines price of oil by actual supply and demand and partly by expectation. A Cartel is a group of sellers of a product who have joined together to control its production, sales, and price to obtain the advantages of monopoly. OPEC allows its members to organize their economic policies to guarantee income and influence of oil prices globally. OPEC was formed at the Baghdad conference in September 1960. The first members were Iraq, Kuwait, Iran, Venezuela, and Saudi Arabia. The organization later included the United Arab Emirates, Qatar, Algeria, Indonesia, Ecuador, Nigeria, Angola, Libya and Gabon. OPEC has a unique structure because its members are not companies but rather countries. As these countries have formed a cartel, the market is served by a monopoly as the primary purpose of a cartel is not only to drive up prices, necessarily, but to drive competitors out of the market. The members not only agree to the total level of production but also about the amount produced by each member. OIL PRICE TREND The...
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...assigned cartel authority and all members have to comply with this body. Therefore, the OPEC members can no longer make any independent price and output decisions on their own. An important attribute of this model is the absence of disputes among the cartel members on the basis of the optimal price and output for each member. However, several factors will prevent this form of cartel of taking place in the OPEC. First of all, each OPEC country maintains control over its own production and there are serious doubts that the OPEC members would want to assign the price and output decisions to some central authority. Secondly, even side payments to high-cost producers from low-cost producers to induce the former to reduce their production are impractical because they are so costly to negotiate and enforce. Finally, the OPEC nations have traditionally eschewed any production controls, viewing their production decisions as sovereign national matters. 2. Why is this form of cartel likely to be the most durable? This form of cartel maximizes the joint profits of its members and is completely insulated from internal cheating tendencies. Members may disagree as to the cartel's assignment of profit shares, but there is no conflict as to total output and the plants from which output is produced. As a result, under this form of organization the cartel's central body extracts the maximum possible monopoly profits from buyers and avoids the defects usually fatal to real-world cartels. 3. Using...
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...explain why cartels may not succeed in any economy including Kenya. A cartel is a formal (explicit) agreement among competing firms. It’s a formal organization of producers and manufacturers that agree to fix prices, marketing and production. Cartels usually occur in an oligopolistic industry, where there are a small number of sellers and usually involve homogenous products. Cartels members maybe agree on such matters as prices fixing, total industry output, market shares, allocation of customers, allocation of territories and the division of profits. There are either private or public cartels. One can distinguish private cartels from public cartels. In the public cartel a government is involved to enforce the cartel agreement, and the government's sovereignty shields such cartels from legal actions. private cartels are subject to legal liability under the antitrust laws now found in nearly every nation of the world. Many price fixing or market sharing agreements eventually either collapse or whither on the vine - here are some reasons: 1. Falling demand creates excess capacity in the industry e.g. during an economic downturn / recession - the classic example here is the deep tension within the OPEC oil cartel caused by the world economic recession which is causing a steep fall in the global demand for crude oil. Will OPEC deliver on planned output cuts in order to stabilize the price of crude at or around $50 a barrel? 2. Disruption caused by the entry of non-cartel firms...
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...Since the 1973 oil price shock, the history and behaviour of the Organization of Petroleum Exporting Countries (OPEC) have received considerable attention both in the academic literature and in the media. Many conflicting theoretical and empirical interpretations about the nature of OPEC and its influence on world oil markets have been proposed. The debate is not centred on whether OPEC restricts output, but the reasons behind these restrictions. Others explain production cuts in the 1970s in terms of the transfer of property rights from international oil companies to governments (Johany, 1980; Mead, 1979). Others explain output restrictions in terms of coordinated actions of OPEC members. Within the literature, OPEC behaviour ranges from classic textbook cartel to two block cartel (Hnyilicza and Pindyck, 1976), to clumsy cartel (Adelman, 1980), to dominant firm (Salant, 1976; Mabro, 1991), to loosely co-operating oligopoly, to residual firm monopolist (Adelman, 1982) and most recently to bureaucratic cartel (Smith, 2005). Others have suggested that OPEC oscillates between various positions but always acts as a vacillating federation of producers (see for instance Adelman, 1982; Smith, 2005). The existing empirical evidence has not helped narrow these different views. Griffin’s (1985) observation in the mid-1980s that the empirical studies tend to “reach onto the shelf of economic models to select one, to validate its choice by pointing to selected events not inconsistent...
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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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...oligopolistic market. For instance, each time a firm makes a price or output decision to the market, others competitors are likely to react to the changes either legally or illegally in the industry. Hence, oligopoly can be divided into two different types, non-collusive oligopoly and collusive oligopoly. Non-collusive oligopoly means where firms are working independently and competing properly. In contrast, collusive oligopoly occurs when firms start working together privately and illegally to control the market. Cartel and price leadership are the two most common examples of collusive oligopolies. Cartel is a clear agreement between a group of companies which get together to make decisions upon the prices and market shares. Cartels usually happen in an oligopolistic industry when the rival firms decide not to compete with each other, but at the same time, maximising the profit earned. A common form of cartels is centralised cartel. Centralised cartel is a complete form of cartel which the oligopolistic firms agree to decide the total industrial...
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...reduce prices. * Cheating may occur. * A new entry can destabilize the price leader's position… -If a price leader in an oligopolistic market sets price and output in order to maximize profits and if that setting is high; then this will encourage the entry of new firms into the market. And that will result in the loss of profits over the long run. 3. (Collusion and Cartels) why would each of the following induce some members of OPEC to cheat on their cartel agreement? a. Newly joined cartel members are less–developed countries. * By producing more output than it has agreed to produce, the new member country can increase its share of the cartel's profits. b. The number of cartel members doubles from 11 to 22. * The greater the number of firms, the more probable it is that one of those firms is a maverick firm; that is, a firm known for pursuing aggressive and independent pricing strategy. c. International debts of some members grow… d. Expectations grow that some members will cheat. * In this case, cheating would mean that a country produces more barrels of oil each day than its assigned amount. In order to grab a larger share of the profit. 4. (Game Theory) While grading a final exam, an economics professor discovers that two students have virtually identical...
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...Investigating the fines imposed on the car-glass market cartel Maastricht University | | | | School of Business & Economics | | | | Place & date: | Maastricht 11.12.12 | | | | Name, initials: | Sander Kloosterman S.L | | For assessor only | | ID number: | I6050087 | | 1. Content | | Study: | Economics | | 2. Language structure | | Course code: | EBC1010 | | 3. Language accuracy | | Group number: | 14 | | 4. Language: Format & citing/referencing | | Writing tutor name: | Caro Struijke | | Overall: | | Writing assignment: | Resit Paper | | Advisory grade | | | | | Assessor’s initials | | s.kloosterman@student.maastrichtuniversity.nl 1. Introduction 3 2. Cartels 3 3. The Car Glass Market 4 4. The Economic Impact of the Cartel 5 5. Conclusion 7 References: 8. 1. Introduction In the European car market, the car glass market is one of the most important parts of the market. As a result in the glass market twenty percent of all products sold are allocated to the automotive sector. The European Commission has the job of ensuring that each firm within the market has the same opportunities and are not able to behave anti-competitively. In 2008, the European commision announced that four car glass-producing companies were accused of engaging in a cartel organisation. These four companies were Pilkington, Soliver, Saint-Gobain and Asahi and were fined a total amount of €1,4 billion. The amount that...
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...consumer to accept the high price for gas oil prices forms the first approach towards establishing a business. Gasoil businesses in the world run as cartel where it supply and prices are determined by the few stakeholders in the industry. The stakeholders form an agreement among their competitors on the price, making and, marketing of the product (Fredy, 2010). The cartel though the production affects the GDP growth rate. Gross domestic product represents the monetary value of the goods produced in the country within a year. The enterprise runs as an oligopoly. An oligopoly represents a business type where there are few sellers in the market. The few sellers are due to the restriction imposed on entry to a monopoly. The production rights are restricted by the producer and the producer also controls the prices of the commodity (Brake, 2011). Unemployment will be apparent as the restriction holds down people with the relevant skills to join in the trade. Price control is done through price fixing and determining the market share. The market shares will go a long way to influencing international trade. International trade represents trade past the nation boundaries (Derik, 2010) . The main purpose of a cartel is profit increment to the individual by reducing competition. Edgar by starting up the gas oil business will gain profit margin from the monopoly. The government is also be involved in the control of the production rights of such a cartel. It is through fiscal policies that...
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...explain why cartels may not succeed in any economy including Kenya. A cartel is a formal (explicit) agreement among competing firms. It’s a formal organization of producers and manufacturers that agree to fix prices, marketing and production. Cartels usually occur in an oligopolistic industry, where there are a small number of sellers and usually involve homogenous products. Cartels members maybe agree on such matters as prices fixing, total industry output, market shares, allocation of customers, allocation of territories and the division of profits. There are either private or public cartels. One can distinguish private cartels from public cartels. In the public cartel a government is involved to enforce the cartel agreement, and the government's sovereignty shields such cartels from legal actions. private cartels are subject to legal liability under the antitrust laws now found in nearly every nation of the world. Many price fixing or market sharing agreements eventually either collapse or whither on the vine - here are some reasons: 1. Falling demand creates excess capacity in the industry e.g. during an economic downturn / recession - the classic example here is the deep tension within the OPEC oil cartel caused by the world economic recession which is causing a steep fall in the global demand for crude oil. Will OPEC deliver on planned output cuts in order to stabilize the price of crude at or around $50 a barrel? 2. Disruption caused by the entry of non-cartel firms into...
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...Organization of the Petroleum Exporting Countries | | | | | Headquarters | Vienna, Austria | Official languages | English[1] | Type | Trade bloc | Membership | 12 states (2011)[show] * Algeria * Angola * Ecuador * Iran * Iraq * Kuwait * Libya * Nigeria * Qatar * Saudi Arabia * United Arab Emirates * Venezuela | Leaders | - | President | Rostam Ghasemi | - | Secretary General | Abdallah el-Badri | Establishment | Baghdad, Iraq | - | Statute | September 10–14, 1960 | - | in effect | January 1961 | Area | - | Total | 11,854,977 km2 4,577,232 sq mi | Website www.opec.org | | Currency | Indexed as USD-per-barrel | | | | Current members OPEC has twelve member countries: six in the Middle East, four in Africa, and two in South America. Country | Region | Joined OPEC[25] | Production (bbl/day) | Algeria | Africa | 1969 | 2125000 !2,125,000 (16th) | Angola | Africa | 2007 | 1948000 !1,948,000 (17th) | Ecuador | South America | 2007[A 1] | 0485700 !485,700 (30th) | Iran | Middle East | 1960[A 2] | 4172000 !4,172,000 (4th) | Iraq | Middle East | 1960[A 2] | 3200000 !3,200,000 (12th) | Kuwait | Middle East | 1960[A 2] | 2494000 !2,494,000 (10th) | Libya | Africa | 1962 | 2210000 !2,210,000 (15th) | Nigeria | Africa | 1971 | 2211000 !2,211,000 (14th) | Qatar | Middle East | 1961 | 1213000 !1,213,000 (21st) | Saudi Arabia | Middle East | 1960[A 2] | 8800000 !8,800,000 (1st) | United...
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...sell him drugs through our door and our window” (Catholic Online). Mexico is the main foreign supplier of marijuana and a major supplier of methamphetamine to the United States. Mexico is responsible for 90% of drugs that comes from the southern border of the United States. Mexico has been a producer and distributer of illegal drugs for generations; the country now finds itself in a battle with powerful and well-financed drug cartels. The corruption in the Mexico, the trafficking of weapons and the violence has made it possible for cartels to keep operating. Since 2006, when president Calderon declared the war on drug cartels, violence in Mexico has increased dramatically. The country has certainly seen a big rise in drug violence, with cartels fighting for control of major shipment routes. Mexican cartels have been tied to both human and arms trafficking, auto theft and kidnapping (Siddique). The drug business is a cycle between the United States and Mexico. Mexico sends the cargo and the United States sends the money, fueling the drug cartels. Drug cartels use the money to bribe government officials; they also buy weapons in the United States to perpetuate the violence in Mexico....
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