Business
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- Date Submitted: 05/09/2011 10:14 AM
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Abstract
This paper discusses differences among monopoly, cartel, and oligopoly, welfare impacts of oligopoly and monopoly, use of game theory to understand companies’ interactions within cartels and oligopolies, OPEC’s economic significance and its actions over the next one year, and change in price of oil from 2004 to 2009.
Market Structures
Monopoly, Oligopoly, and Cartel
Monopoly refers to an industry or market with single seller who has complete control over prices. In a monopoly, there is no close substitute for the products or services on offer. Typical examples of monopolies include public utilities, which operate in a natural monopoly because of the associated huge capital investment. In contrast, oligopoly refers to a market or industry environment characterized by a) small number of rival sellers, b) interdependence among the sellers due to their large size relative to that of the industry, c) substantial economies of scale, and d) excessive entry barriers to the industry. Examples include markets such as airlines, car rental, and automobile. On the other hand, a cartel refers to a form of oligopoly in which a group of companies agrees to coordinate their pricing and production decisions to earn monopoly profit. It is common among sellers of commodities such as steel and oil. OPEC (Organization of Petroleum Exporting Countries) is a classical example of a cartel (Baumol & Blinder, 2008)
Welfare Impacts of Monopoly and Oligopoly
From a social standpoint, monopolies undermine the welfare of consumers and allocate resources in a suboptimal way. This is because prices of goods and services are high, quantity supplied smaller and all the profit goes to the monopolies. If the monopoly is a local firm, this profit reflects transfer of income from some members of the society to others, who may be deserving. However, if a foreign one, the profit is transferred overseas, which implies a net loss to the society. Moreover, monopolies deny...
This paper discusses differences among monopoly, cartel, and oligopoly, welfare impacts of oligopoly and monopoly, use of game theory to understand companies’ interactions within cartels and oligopolies, OPEC’s economic significance and its actions over the next one year, and change in price of oil from 2004 to 2009.
Market Structures
Monopoly, Oligopoly, and Cartel
Monopoly refers to an industry or market with single seller who has complete control over prices. In a monopoly, there is no close substitute for the products or services on offer. Typical examples of monopolies include public utilities, which operate in a natural monopoly because of the associated huge capital investment. In contrast, oligopoly refers to a market or industry environment characterized by a) small number of rival sellers, b) interdependence among the sellers due to their large size relative to that of the industry, c) substantial economies of scale, and d) excessive entry barriers to the industry. Examples include markets such as airlines, car rental, and automobile. On the other hand, a cartel refers to a form of oligopoly in which a group of companies agrees to coordinate their pricing and production decisions to earn monopoly profit. It is common among sellers of commodities such as steel and oil. OPEC (Organization of Petroleum Exporting Countries) is a classical example of a cartel (Baumol & Blinder, 2008)
Welfare Impacts of Monopoly and Oligopoly
From a social standpoint, monopolies undermine the welfare of consumers and allocate resources in a suboptimal way. This is because prices of goods and services are high, quantity supplied smaller and all the profit goes to the monopolies. If the monopoly is a local firm, this profit reflects transfer of income from some members of the society to others, who may be deserving. However, if a foreign one, the profit is transferred overseas, which implies a net loss to the society. Moreover, monopolies deny...