Previous

Page - 5

The motivation behind this kink is the idea that in an oligopolistically or monopolistically competitive market, firms will not raise their prices because even a small price increase will lose many customers. However, even a large price decrease will gain only a few customers,
because such an action will begin a price war with other firms. The curve is, therefore, more price-elastic for price increases and less so for price decreases. Firms will often enter the industry in the long run.

Basically OPEC acts as monopoly not because of it's command over oil market, but due to the following reasons.

OPEC has stood the test of time, and since its creation, has proven to be one of the most prosperous and effective industrial monopoly alliances the world has known. Notwithstanding OPEC's success as a market controlling power, noncompliance and cheating by members have caused some problems along the way. In order for a cartel to successfully control a market, there must be complete cooperation and trust among members.

OPEC's history exemplifies and supports this statement. In 1973 and 1974, all of OPEC's member nations worked together under the parameters established by the organization, and in turn, were able to raise the price of oil four-fold. Contrarily, in 1995, OPEC set a price target of twenty-one dollars, but as a result of deception and a lack of trust among member states, some members exceeded their quotas and the over-production and consequent flooding of the market caused the price to fall well below the twenty-one dollar goal. Still, despite devious actions by some members taking advantage of the organization, OPEC continues to hold sway over the trading of petroleum globally. OPEC became oligopolist, because of its competitors.

Types of Oligopoly

1. Non-collusive Oligopoly

2. Cournot's Model of Duopoly

3. Collusive Oligopoly

1. Non-collusive Oligopoly

It assumes a certain pattern of reaction of competitors despite the fact that the expected reaction does not materialize, i.e., the firms continue to assume that the initial assumption holds good.

Next

* Contributed by -
V. Venkata Raghvendra is an Engineering graduate with Electrical & Electronics as background. Currently working as sales promoter for MOTOROLA and pursuing Post Graduate Diploma in Management from Institute of Public Enterprise (IPE), Hyderabad.
Article posted on December 1, 2008.