Perloff (2007), observes that Monopoly is an enterprise which is a sole producer of a particular good or service. These goods and services do not have close substitutes. A monopoly has total control of a certain good or service. It is possible for a monopoly to raise its price and have no customer loss. There are no competitors in a monopoly. The market -demand curve for a monopolistic industry is downward sloping and any point along that curve can be chosen by a monopoly.
Monopolies originate from the market powers that act as an entry barrier. There are reasons that prevent a certain competitor from competing in the same market. Some of these barriers include: Large capital requirements or investments that a small firm cannot afford. Monopolies also experience economies of scale where they have declining costs that are combined with startup costs that are large and the competitor is disadvantaged (Zhao, 2001). They are capable of cutting prices lower than the operating costs of a new entrant and can drive the new entrant out of the market. Another barrier that can stop a competitor from inflowing the market would be the monopolies ability to acquire, and combine the best technology in producing its goods. A new entrant may not have the resources to use the best technology. Example of a monopoly may include firms that provide public utilities like electricity, natural gas, for example, Telecom New Zealand.
The welfare outcomes of a monopoly are that consumers are not better placed under a monopoly. This is because the prices are high and the output is low compared to a perfect competition (Perloff, 2007).
On the other hand, an oligopoly is a market type that has few producers. The new firms that enter the markets are often faced with obstacles. In an oligopolistic industry, is possible for the firms to get economic profits in the long run. Oligopoly can be any firm that produces products that are relatively homogenous. Products like steel, automobile, cigarettes are considered homogenous and are produced by few firms.
It is difficult to determine the price and output of an oligopolistic industry and also difficult to predict its decisions on strategies such as advertisements and investment. There is usually interdependence between oligopolies and an action by one firm can affect another firm’s performance. In an oligopoly industry, firms are required to determine their competitors’ probable move as when they are in the process of decision making (Zhao, 2001). Considering such strategies is complex. There is more than one model of equilibrium in an oligopoly unlike in the perfect competition.
There are factors to consider when making choices in an oligopoly. Factors such as how frequent firms compete with each other, whether the firms are competing in output or prices and the information they have on their rivals should be considered. Firms in an oligopoly have to choose output with price that is adjustable to clear the market. The reason why there is a difference in an oligopoly market is that the firms consider selecting prices as an alternative to choosing quantities (Perloff, 2007). In their attempts to maximize profits, oligopolistic firms segregate the market. The firms in an oligopoly are usually torn between colluding to increase profits and competing with each other and gain a competitive advantage over its competitors.
The welfare effects of an oligopoly are such that if an individual firm reduces costs, welfare will increase if and only if the market share of a firm is more than a weighed sum of the market share of other firms.
Contrastingly, a cartel is made up of firms or industries that form an agreement to fix prices, production or marketing. Most cartels are found in a market that has small number of manufactures and sellers, mostly an oligopoly and the products found in the cartel industry are homogenous. Cartels act in unison and they are known to control output so as to raise profits.The firms in an oligopoly industry collude so that they can increase their profits and reduce competition. An example of cartels is OPEC (Mankiw, 2008).
The main differences between monopolies, cartels and oligopolies are that a monopoly is the sole producer or manufacturer of certain goods and services while an oligopoly is a combination of few firms in an industry that provide homogenous products. In contrast, a cartel is a form of collusion between oligopolies so as to make joint profits and make other agreements on prices, markets and production. Most cartels act as monopolies (Perloff, 2007).
Game theory approach is used to explain strategic influence in the oligopolistic firms. The game theory shows the situations in which firms, when making a particular decision, consider how the other firms will respond when a particular decision is made. The game theory uses a mathematical technique to demonstrate how oligopoly firms interact in the business.
The game theory uses a prisoner dilemmas game where two prisoners are faced with certain conditions and options. The prisoners are made to choose conditions that favor them. This is the same dilemma that the oligopoly firms uses. This is because in an oligopoly, each firm knows that their profits will depend on the decisions that the other firm will make
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Stanley (2010) observes that OPEC stands for the Organization of The Petroleum Exporting Countries. The main purpose of OPEC is to ensure that the oil prices in the international oil markets are stable through economic supply of petroleum products. It seeks to eliminate harmful fluctuations. The members of OPEC usually predict market fundamentals. These fundamentals can be economic growth rates, the demand and supply of petroleum. They use these fundamentals to ensure consistent supply to consumers and also promote price stability. The steady supply to consumers is done at a reasonable price.
Over the last five years, oil price have been unstable. The price seems to be going higher and this is due to a lot of reasons. Iraq is one of the OPEC members and the war in Iraq led to a decrease in oil production. Iran decision to use her country’s oil as a weapon has also led to a decrease in oil supply. This is because Iran will cut off Oil exports. Iran produces Oil exports worth 2.99 million barrels a day and this will produce a higher demand for oil leading to increase in oil prices (Stanley, 2010). The growing demand for oil keeps on rising especially in the US which is the largest consumer of petroleum in the world. The demand for crude oil has grown to a high of 3.4 %. The major consumer of oil is the transportation sector. As the world is becoming globalized, more countries are developing causing a growth in the urban areas. This urbanization leads to higher standards of living causing energy use to rise up especially oil.
Thus, as an advisor to OPEC, I would advice the cartel to keep up with the production of petroleum oil. They should also sanction those members who are willing to stop exporting oil because oil is the most used commodity by many countries in the world. The rising prices of oil should be stabilized by ensuring that there is a steady supply to the international oil markets. Due to the low supply of oil by Iraq, OPEC should consider helping Iraq get to where it was by opening more oil firms in the area and organizing peace conference to stop the ongoing war.