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An institutional arrangement under which buyers and sellers can exchange some quantity of a good or service at a mutually agreeable price. Market can be classified on the basis of the nature of competition: Market
Perfect competition: In a perfectly competitive market it is assumed that owing to presence of many buyers and many sellers selling homogeneous products, the actions of any single buyer or seller has a negligible impact on the market price of product. Imperfect competition: Most of the time individual sellers have some degree of control over the price of their outputs. This condition is referred as imperfect competition. Imperfect competitive markets can be classified into three categories. Monopoly where single seller has control over the industry and no other firm exists producing a close substitute. True monopolies are rare now days. Monopolistic competition where a large number of sellers exist selling differentiated products. Oligopoly is an intermediate form of imperfect competition in which only a few sellers exist in the market with each offering a product similar or identical to the others.
Because there are few sellers. The automobile and petrol markets are also oligopolies. This market is dominated by Woolworths and Coles. Economists measure the seller concentration ratio of an industry to determine whether it is an oligopoly.) to raise prices and restrict production in much the same way as a monopoly. in the billions of dollars. The grocery market in Australia is an oligopoly.e. the decisions of other firms. with stores in most urban and regional areas across Australia. e. Seller concentration ratios are based on the percentage of sales of the four largest firms in the market. a large % of the market is taken up by the leading firms). An oligopolistic market is one where the market is dominated by a small number of firms (usually under ten).Oligopoly: Definition and Meaning A situation in which a particular market is controlled by a small group of firms. In short. An oligopoly is a market dominated by a few large suppliers. The retail gas market is a good example of an oligopoly because a small number of firms control a large majority of the market. as a percentage of all sales in the market. there are at least two firms controlling the market. A primary example of such a cartel is OPEC which has a profound influence on the international price of oil. These firms gain the majority of total sales revenue. nationally. market sharing etc. An oligopoly is much like a monopoly. However. In an oligopoly. To compete with these firms would require a large investment. conservatively. and thus price sensitive. As in monopolistic competition. This ratio is then compared to the total sales of the twenty largest firms in the market. In some situations. oligopoly is the form of market organization in which there are few sellers either a homogeneous or a differentiated product. The degree of market concentration is very high (i. the barriers to entry in an oligopolistic market are higher than in the two market forms.g. each oligopolist is likely to be aware of the actions of the others. These companies have extensive distribution systems. the firms may employ restrictive trade practices (collusion. and are influenced by. Strategic planning by oligopolists needs to take into account the likely responses of the other market participants. Oligopolistic competition can give rise to a wide range of different outcomes. Firms within an oligopoly produce branded products (advertising and marketing is an important feature of competition within such markets). in which only one company exerts control over most of a market. firms in an oligopolistic market sell similar goods and services which are close substitutes. and entry into or exit from the market is possible but 2 . this is known as a cartel. The decisions of one firm influence. An oligopoly is a market form in which a market or industry is dominated by a small number of sellers (oligopolists). Where there is a formal agreement for such collusion.
difficult. the loyalty to customers to existing firms. Oligopoly is the most prevalent form of market organization in the manufacturing sector of industrial countries. including the United States. the huge investments and specialised inputs required to enter the industry. 3 . The sources of oligopoly as well as the barriers to entry are economies of scale. control over the supply of required raw material and government franchise. patents and copyrights. The degree by which an industry is dominated by a few large firms is measured by concentration ratios. The distinguishing characteristic of oligopoly is the interdependence or rivalry among the firms in the industry.
each of which is relatively large compared to the overall size of the market. electronics. Examples of non-price competition such as free deliveries and installation. Interdependent decision-making Interdependence implies that firms must take into account probable reactions of their rivals to any change in price. While each firm does not have as much market control as monopoly. tires. those of steel.g. Entry barriers Significant entry barriers prevail in the market that thwart the dilution of competition in the long run. branding of products and heavy spending on advertising and marketing.g. zinc. output or forms of non-price competition.g. Though many smaller firms can operate on the periphery of an oligopolistic market. A few large producers The most important characteristic of oligopoly is an industry dominated by a small number of large firms. longer opening hours (e. 3. or standardized. it definitely has more than a monopolistically competitive firm. breakfast cereal.This helps dominant firms to maintain supernormal profits. Non-price competition Non-price competition a consistent feature of the competitive strategies of oligopolistic firms. offer different products and place an emphasis on nonprice competition. e. e. supermarkets and petrol stations).Features of Oligopoly: 1. but none of them is large enough to have any considerable effect on market prices and output 4. industrial alcohol. Other industries. those of automobiles. such as advertising. 2. 4 . 5. copper. This characteristics gives each of the relatively large firms substantial market control. products. lead. Homogenous products Some oligopolistic industries offer homogenous.
Cartels. one of the imperfectly competitive market structure where a few large firms dominate the market. Homogeneous. Oligopoly can be collusive and non-collusive. the oligopoly is asymmetric. Basically There are several types of oligopoly. Non-collusive oligopoly: Non collusive oligopoly exists when the firms in an oligopoly do not collude and so have to be very aware of the reactions of other firms when making price decisions. PURE OLIGOPOLY:Homogenous product means that product the company is producing is identical with any other same product that different company is producing.TYPES OF OLIGOPOLY:Oligopoly. These products are usually not as many as differential products for example steel.Pure oligopoly that has a homogeneous product 1. These companies are also best known in the world because they usually compete in worldwide market and not a domestic market and spend a huge amount of their profit on advertising. 1. When this is not the case. There are two main types of oligopoly. wheat and etc. such as OPEC. which are identical with one another. When all firms are of (roughly) equal size. in which producers agree among one another as to pricing of output and allocation of output markets among themselves. Collusive oligopoly: If firms operate in cooperative mode to minimize the competitions between themselves this behaviour is called as Collusion. which are similar (in the eyes of the purchasers) but not identical. or pure. 5 . When two or more firms agree to set their outputs or prices to divide the market among themselves is called as collusive oligopoly Industry containing few producers (oligopoly). oligopoly involves rivalry among a few Producers of products.Impure oligopoly that has a differentiated product 2. the oligopoly is said to be symmetric. IMPURE OLIGOPOLY/Differentiated Oligopoly:Differentiated products are almost identical differential products are all the other products any company is producing and even when products are similar in many ways there still can be lots of differences between each product. Differentiated oligopoly involves rivalry among a few producers of products. 2. gold. are all homogenous products because there are very few differences among them.
TYPES OF COLLUSIVE OLIGOPOLY:There are two types collusive oligopoly A. Price leadership ± tacit collusion This occurs when one firm has a clear dominant position in the market and the firms with lower market shares follow the pricing changes driven by the dominant firm. The aim of this is to maximise joint profits and act as if the market was a pure monopoly. When this happens the existing firms decide to engage in price fixing agreements or cartels. Overt collusion when firms openly agree on price. in affect acting as a monopoly but dividing any profits that they make. Collusive oligopoly exists when the firms in an Oligopolistic market charge the same prices for their products. Firms who coordinate their activities through overt collusion and by forming collusive coordinating mechanisms. B. . and other decisions aimed at achieving monopoly profits.are collusive oligopolies. 6 . Such a group of independent working in union is called as cartel. output.
A cartel is a formal (explicit) agreement among competing firms. allocation of customers. It is a formal organization of producers and manufacturers that agree to fix prices. marketing. there are no restrictions on cartel formation. The aim of such collusion (also called the cartel agreement) is to increase individual members' profits by reducing competition. internationally. cartels are illegal.S. Definition: A cartel is a formal organization of producers of a commodity. and the division of profits or combination of these. where there is a small number of sellers and usually involve homogeneous products. Cartel members may agree on such matters as price fixing. however. however. Its purpose is to coordinate the policies of the number of firms so as to increase profits.. total industry output. 7 . formally and informally A cartel is defined as a group of firms that gets together to make output and price decisions. Cartels usually occur in an oligopolistic industry. allocation of territories.Cartel: Definition and types. In the U. Cartels are prohibited by antitrust laws in most countries. The conditions that give rise to an oligopolistic market are also conducive to the formation of a cartel. and production. market shares. The organization of petroleum-exporting countries (OPEC) is perhaps the best-known example of an international cartel. they continue to exist nationally and internationally. establishment of common sales agencies. to limit supply and to limit competition. A cartel is a group of formally independent producers whose goal it is to fix prices. bid rigging. cartels tend to arise in markets where there are few firms and each firm has a significant share of the market. in particular.
allocate output among its members and determine how profits are to be shared.g. 2. Market sharing cartel: It gives each member the exclusive right to operate in a particular geographical area.Types of cartel: 1. e. OPEC. Centralized cartel: This is a formal agreement among the oligopolistic producers of a product to set the monopolistic price. e.Organization of Petroleum Exporting Countries.g. 8 . Du Pont of United States and Imperial chemicals of UK agreed to divide market for some chemicals in such a way that Du Pont had the exclusive rights to sell in north and central America and Imperial Chemicals had exclusive rights to sell in the British empire and Egypt.
9 . has proven to be one of the most prosperous and effective industrial monopoly alliances the world has known. established at the Baghdad Conference held in Iraq. as well as much of the world. As inflation rose.OPEC: Introduction OPEC (Organization of Petroleum Exporting Countries) is a permanent. long lines formed of people trying to buy gasoline for their cars. was in the grip of an economic crisis. investment fell and job growth shrank. presently working with 13 nations. in order to secure a steady income to the producing countries. As it has been mentioned above there are two types of cartels : market sharing cartel and centralized cartel. Opec as cartel In 1973 OPEC began restricting the oil production of its member nations. they were forced to pay the higher prices and watch their own collective profits shrink. to the price of white bread on the grocery store shelf. Inflation rose as almost every consumer good became more expensive. Its objective is to coordinate and unify petroleum policies among Member Countries. OPEC is a centralized cartel which is formed by 13 countries producing oil. allocate output among themselves and share profit. From the price of gasoline at the pump. nearly all products became more expensive to the point of crisis. which will shows us that OPEC is an oligopolists. but due to the following reasons. OPEC has stood the test of time. there must be complete cooperation and trust among members. Many service stations ran out of gasoline to sell. economic and regular supply of petroleum to consuming nations. 10-14 September 1960. Opec has characteristics of both market sharing and centralized cartel. The effect of OPEC's restrictions was felt throughout the world economy. The price for oil immediately inflated and the member nations profited greatly. and a fair return on capital to those investing in the petroleum industry. The member countries combinedly agree to set monopoly price. Since industrialized nations were so dependent on oil to run their industries. The United States. In order for a cartel to successfully control a market. and since its creation. Notwithstanding OPEC's success as a market controlling power. an efficient. noncompliance and cheating by members have caused some problems along the way. but due to the presence of non-OPEC countries which will also affect the oil prices and cause competition to affect fixing prices of crude oil. OPEC is a centralized cartel but Basically OPEC acts as monopoly not because of its command over oil market. Even the experts says that OPEC is monopoly. At service stations in the United States. while others rationed out the fuel by allowing each customer to buy only so much at a time. inter-governmental organization.
Centralized cartel is a formal agreement among the oligopolistic producers of a product to set the monopoly price similarly in opec all the players of the opec(i. The players of cartel. etc. Though there are plenty of cartels formed secretly and operating in india doesn¶t matter whether they are successful cartel or not. There are also number of cartels who fails to bring monopoly in the market. As a result. Cartel in India According to section 2 (c) of the india competition act 2002 cartels are illegal in india and it is regarded as the most pernicious violation of competition and subject to severe penalties. Qatar.50 per barrel in 1973 to over $40 per barrel in 1980. however. Iraq. Nigeria. they only emphasize on maximizing their profit irrespective of their social duties. to increase the price they might restrict the supply of commodity or service which can be resulted into turmoil or temporary shortage. Kuwait. Cartel tries to raise prices whether it is in favour of society or not. and by mexico in newly discovered fields). switching to small fuel efficient automobiles. Sometimes.market sharing cartel gives each members to operating a particular geographical area and in case of opec 11 countries operates in their geographical area. Hence. coffee. tin. tea. Indonesia. stimulated conservation in developed nation (by lowering thermostats. copper etc.11 oil exporting countries) comes together and they tries to increase the price or in other words we can that they tries to take control of oil price in their hands.). by the united states in Alaska. and iran. opec was able to increase the price of petroleum from $2. Expanded exploration and production (by the united kingdom and Norway in the north sea. and led to the switching to other energy sources (such as coal).e. Case Study on OPEC It is often asserted that opec was able to sharply increase petroleum prices and profits for its members during the 1970¶s by restricting supply and behaving as a cartel. On the other hand opec also meets the characteristic of centralized cartel. while the 10 . This. want to charge high prices in order to maximize short run profits. we can say that opec is a market sharing cartel. Saudi Arabia. the densely populated and low petroleum reserved countries. cheating can be detected and prevented and low expectation of severe government punishment. The reason of failure of any cartel could be lack of trust or cheating. Opec tries to maximize joint profits which is also one of the major characteristic of centralized cartel. In india such cartel are formed in industry of cocoa. such as Indonesia. iran. it seldom succeed in its effort under the conditions of excess supplies that have prevailed since 1980. the arab emirates and Venezuela (opec used to have 13 members but equador and gabon left it) As a result of supply shocks during the arab-israeli war in the fall of 1973 and the iranien revolution during 1979-1980. Nigeria. Cartels are bad for society. Eleven nations are now members of opec: Algeria. Although opec met regularly for the purpose of setting petroleum prices and production quotas. Conditions for cartel success are low organizational costs. opec share of world oil production fell from 55% in 1974 to less than 40% in 1999. In general. opec is moreover a centralized cartel because it is acting sharply since past few years to take control of oil prices. However. Libya.
During the following years sharp hike in prices of crude oil has been detected. it failed to $14 in 1998. prefer lower prices to discourage conservation and non opec production in order to maximize long run profits. How high petroleum prices will be in the future depends on how strong the world demand for petroleum will be and on how successful opec (with the cooperation of other non-opec oil exporters. for the most part. such as mexico) will be in the cutting supplies. many economists are convinced that opec never really controlled the world crude oil market. The average price of petroleum was $19 per barrel in 1997. The above case is indicating that due to the shortage of supply and increase in consumption opec has grabbed the opportunity to higher the prices of crude oil. Solution Opec (Organization of petroleum exporting countries) is a cartel and therefore it always tries to increase the prices of crude oil. so that by the middle of 1991 oil prices were a slow as befor the invasion of Kuwait. During the past few years (1997 to 1999).sparsely populated and large reserved countries such as Saudi Arabia and Kuwait. opec was given credit for the sharp increase in petroleum prices. Most of time in the past. Under the conditions of tight supply that prevailed during the 1970¶s. oil prices have been very volatile. market conditions. opec was unable to prevent almost equally sharp price declines. but when excess supply arose. for example. opec did not succeed in controlling supply for long. while opec is often given as the best example of a sometimes a successful cartel. Be that as it may. Even the mini oil shocks resulting from saddam hussein¶s invasion of Kuwait in august 1990 was reversed with the quick victory in the Persian gulf war. for example. during 1999 when growth resumed in asia and Europe). during the financial and economic crisis in south east asia in 1998) and rising when demand rose (as. falling when demand fell (as. and it peaked at $34 in march 2000 (up from $11 at the beginning of 1999). Thus. and petroleum prices reflected. opec was unable to prevent a decline in petroleum prices to the $15 to $20 range and widespread cheating by its members during the 1980¶s. year Crude oil price/ barrel 11 .
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