Monopoly is a market situation where: 1) there is a single seller of a certain type of product or service; 2) there are no viable substitutes because the product or service is in a sense unique so that it transcends brand identity and not easily replaceable; 3) the single seller has control over price by increasing or decreasing the quantity supplied; and 4) there is blocked entry resulting to lack of competitors because of market barriers (Wilkinson, 2005). Examples of monopolies are public utilities, professional sports teams, Viagra for some time before the manufacture of substitutes and Microsoft before the settlement of the case filed against the company by the government. Relative to monopoly, an oligopoly is a market situation where: 1) there are a limited number of sellers; 2) the relationship between the limited sellers are interactive because the decision of one affects the others; and 3) the sellers may control price and market entry through collusion or they may engage in price wars (Wilkinson, 2005). Examples of oligopoly are the UK supermarket industry where Tesco, Sainsbury, Morrisons and Asda comprise a firm-concentration ratio of 70 percent and the UK brewery industries with a firm-concentration ratio of 85 percent. Compared to monopoly and oligopoly, a cartel is a number of legally independent sellers and producers grouped together to control price, limit supply and limit competition. If a centralized institution is created to coordinate the actions of several independent local or regional monopolies then the arrangement creates a cartel. If there is a formal agreement to collude in order to fix price by oligopolies then this creates a cartel. (Wilkinson, 2005) Examples of cartels are De Beers diamond, 1999 Vitamin cartel, MLS service, and OPEC.
Monopolies are expected to sell their goods at a higher price due to lack of competition (Png, 2002). This may discourage some consumers to buy but majority are willing to pay for the unique good or service provided the price remains more or less stable such as in public utilities providing necessities to the market. In the case of public utilities, monopoly is ideally a preferred market situation so that price is controlled and supply is accessible to majority of consumers. Oligopolies benefit consumers in cases of price wars because the consumer is able to purchase goods and services at low prices (Png, 2002).
Game theory is part of applied mathematics seeking to study the strategic situations involving players choosing different actions to maximize their return. Applying the game theory involves the development of a game representing a certain economic situation. A single or several solution concepts are identified then the strategy sets are applied to the economic situation to determine which approximate equilibrium. Two purposes are identified for game theory, which are descriptive to predict human behaviour and normative to determine ideal human behaviour in a given situation. (Ginits, 2000)
Economic Purpose of OPEC & 5-year Oil Price Trend
OPEC serves the economic purpose of providing a venue for the regulation of oil production, supply and prices to ensure sustainability of the oil industry and profit for member countries. OPEC performs regulation by coordinating and unifying the policies of all member countries so that oil prices are uniform removing competition so that all the member countries are secured of profit. Based on oil price chronology [Appendix] oil prices in the past five years experience erratic upward and downward trends with a general trend towards increasing oil prices.
OPEC’s Possible Future Actions
There are certain considerations for OPEC in drawing its short-term plan for the next year, which are demand, substitutes and technology. OPEC is likely to be weary of changes in the market. In terms of oil prices, OPEC will still continue to change prices depending upon these considerations. However, OPEC will try to establish security nets to strengthen its position as the supplier of majority of energy source worldwide by balancing price relative to demand to ensure continued profit, this is the reason for monthly price fluctuations. OPEC members will also ensure supply by increasing their investments in oil production facilities to achieve cost efficiency so that despite a decrease in price the producers are still ensured of acceptable profit levels. Technological advancements in production not only ensures supply but also spare supply to enable OPEC to meet any radical changes in demand. OPEC will also ensure demand through multilateral agreements and alliances with key countries constituting majority of its market especiall on environmental issues.
References
Energy Information Administration (2005). World Oil Market and Oil Price Chronologies: 1970-2004. Retrieved March 22, 2006, from http://www.eia.doe.gov/cabs/chron.html.
Ginits, H. (2000). Game Theory Evolving. Princeton: Princeton University Press.
Png, I. (2002). Managerial Economics. Malden, MA: Blackwell Publishers Ltd.
Wilkinson, N. (2005). Managerial Economics. New York: Cambridge University Press.
Credit:ivythesis.typepad.com
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