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Key feature that distinguishes oligopoly from monopoly
The disadvantages of oligopoly
The disadvantages of oligopoly
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Oligopoly is a market structure in which only a few sellers offer similar or identical products. It is an intermediate form of imperfect competition. OPEC is an epitome of Oligopoly.
Features of Oligopoly:
• Non Price Competition
• Interdependent decision making
• Entry Barriers
If organizations behave in cooperative mode to mitigate the competitions amongst themselves it is called Collusion. When two or more organizations agree to set their outputs or prices to maintain monopoly it is called as collusive oligopoly.
OPEC acts as a cartel. If OPEC and other oil exporters did not compete, they could ensure much higher prices for prices for everyone.
Output quotas of its members produced staggering price increases (from $1.10 to $11.50 per barrel in the early 1970's, and up to $34.00
in the late 1970's: an increase of 3400% in ten years).
The relative success of OPEC can be attributed to the following advantages it has enjoyed relative to other cartels:
1. The low price elasticity of oil demand implies that moderate output restrictions increases price in short run - a favorable environment for a cartel. In 1973 OPEC output
contributed two-thirds of the total world oil production.
2. In 1975 OPEC countries had a substantial market power of 70 %.
3. The effectiveness of OPEC is further enhanced since just four countries
(Saudi, Arabia, Kuwait, Iran and Venezuela) regulate 75% of OPEC’s oil
reserves,.
4. Exploration, production and building new supplies is time consuming and this mitigates the threat of any challenge to OPEC from increased production by non members.
5. Policies of oil importing nations like US have benefitted
OPEC e.g. low prices discouraging production and exploration ;environment ...
... middle of paper ...
...llocation of resources closer to the social optimum, policymakers try to induce firms in an oligopoly to compete rather than cooperate through instrument of antitrust laws. Regulatory bring legal suits to enforce the antitrust laws for example to prevent mergers leading to excessive market power prevent.
Conclusion:
• Collusive oligopolies is more like a monopoly. However it is very fragile since self interest to earn maximum profit of member can tip off the balance and can lead to price war.
• The success of collusive oligopoly is quite dependent on the number of firms involved and their level of cooperation.
• It can be observed that it is difficult to maintain cartels in the long run with an exception of OPEC.
• Policymakers regulate the behavior of oligopolists through the antitrust laws. The proper scope of these laws is the subject of ongoing controversy.