Custom essays on Competition and Market Power

. Oligopoly
The OPEC Oil Cartel Go to www.opec.org (Retrieved May 17, 2010). What are the organization’s stated goals, which countries are members, and when was it founded? Is it normal for them to be successful in keeping oil prices high, or have they faced difficulties in keeping the cartel united in the past?

The Organization of the Petroleum Exporting Countries (OPEC) is an international intergovernmental organization (also called a cartel), established by oil-producing powers and including 12 countries: Iran, Iraq, Kuwait, Saudi Arabia, Venezuela, Qatar, Libya, United Arab Emirates, Algeria, Nigeria, Ecuador and Angola. The aim of OPEC is to coordinate and develop a common policy with regard to oil production among members of the organization, maintaining stable oil prices, providing a stable supply of oil to consumers, and benefit from the investments in the oil industry (OPEC).
OPEC members control about 2/3 of world oil reserves. Their share in the world oil makes 40%, or nearly the half of the world oil exports. At different periods of its history, the Organization of Petroleum Exporting Countries controlled from 25% to 60% of oil production in industrial countries (Hansen & Lindholt, 2008).
At the same time, the cartel represents a very unstable structure, based on collusion in order to establish a monopoly price in the market, which can be unsatisfactory for some members of the cartel; this finally leads to the violation of the cartel agreement.
At first glance, the similarity of the cartel and monopoly is obvious. But the cartel very rarely (in contrast to the monopoly), controls the entire market, because the policy has to deal with non-cartelized enterprises. In addition, the cartel members have quite a powerful temptation to cheat their partners, reducing prices or actively promoting their product, which creates the conditions for the capture of the market (Hansen & Lindholt, 2008).
Failure to fully and consistently use the cartel for the interaction of oligopolistic firms is forcing them to conduct secret economic policy in price changes and in the delineation of the spheres of influence. Such cooperation may manifest itself in the form of price rigidity or leadership in price formation, and through special organizations such as patent pools.
The rigidity of prices is the oligopolistic practice, when, even with changes in costs or demand, an organization is not inclined to change prices, believing that if it has to raise the price, others will follow, which will lead to loss of market share. In this way, the cartel stays away from changing prices due to the fear to unleash “the war of prices.” Leadership in prices means the practice, when the formation of prices for the product is focused on the prices set by the leader – often dominant in this industry. This demonstrates the kind of implicit collusion, although its presence is usually not proven (Böckem, 2004).
Patent pools represent an agreement on specialization and cooperation of production, and the consortium – the union of firms to conduct joint scientific research and joint construction of large investment projects. Both of these organizations perform cartel functions and are the basis for the organization of conspiracy to divide the market.
Thus, the oligopoly is characterized by three features: – there are two or more competing firms in the industry, so that the industry is not monopolized (OPEC and Russia relation); – demand curve has a falling character, so the industry does not have rules of free competition; – at least one large organization operates in the industry, any action of which causes a reaction of competitors (OPEC oligopolistic practices), so that there is no monopolistic competition (Böckem, 2004).

References
Böckem, S. (2004). Cartel formation and oligopoly structure: a new assessment of the crude oil market. Applied Economics, 36 (12), 1355-1369.
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Hansen, P.V. & Lindholt, L. (2008). The market power of OPEC 1973-2001. Applied Economics, 40 (22), 2939-2959.
Larue, B., Gervais, J.P. & Pouliot, S. (2008). Price equivalent tariffs and quotas under a domestic monopoly. Journal of International Trade & Economic Development, 17 (2), 311-322.
Organization of the Petroleum Exporting Countries. OPEC. <www.opec.org>.
Yomogida, M. (2010). Fragmentation and Welfare in Monopolistic Competition. Review of International Economics, 18 (3), 531-539.