ASSIGNMENT ON

OLIGOPOLY
SUBMITTED BY:-GROUP NO 8 SR.NO NAME 1 2 3 4 5 6 Sidharth Vishal Ankit Yogesh Yogendra Vikas
ROLL. NO

58 60 64 63

PR/AB SIGNATUR E PR PR

Submitted to:Dr. Sunita Gupta Konwar DATE-21 AUGUST

LIST OF CONTENTS
CONTENT Acknowlegment Introduction Features of OLIGOPOLY Collusive OLIGOPOLY Introduction to CARTEL Case study Conclusion Bibloigraphy Pg.no 3 4 ..5 6 ..6 ..11 ..13 ..14

ACKNOWLEDGEMENT
We thank DrSunita Gupta Konwarin particular for assigning us this topic and encouraging us to write in thefirst place. We owe much to Mr.Anurag Gupta for his helpful comments. We are indebted to all those who have been helpful throughout the process of writing this Report Mr. Santosh Tyagi , but as the clich goes, we are solely responsible for any remaining errors of fact or judgment.

INTRODUCTION
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. However in reality this situation is seldom realized. Most of the time individual sellers have some degree of control over the price of their outputs. This condition is referred as imperfect competition. Barriers to entry are the factors that make it difficult for new firms to enter an industry which lead to imperfect competition. Mostly commonly known barriers of entry are economies of scale, legal restrictions, high cost of entry and advertising and product differentiation. Imperfect competitive markets can be classified into three categories
1.

Monopoly where single seller has control over the industry and no other firm exists producing a close substitute. True monopolies are rare nowadays. Few examples of monopoly are INDIAN RAILWAYS,DEFENCE and NUCLEAR POWER MANAGEMENT

Monopolistic competition where a large number of sellers exist selling differentiated products. The commodities in this market are differentiated on the basis of characteristics and the conditions surrounding the sale of the product. 3. 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. OLIGOPOLY generally exists where the business requires huge investments at regular basis. As a result only few firms become dominant. Oligopoly usually exhibits the following features: Entry barriers: Significant entry barriers prevail in the market that thwart the dilution of competition in the long run. This helps dominant firms to maintain supernormal profits. Though many smaller firms can operate on the periphery of an oligopolistic market, but none of them is large enough to have any considerable effect on market prices and output. Interdependent decision-making: Interdependence implies
2.

that firms must take into account probable reactions of their rivals to any change in price, output or forms of non-price competition.

Non-price competition: Non-price competition a consistent

feature of the competitive strategies of oligopolistic firms. Examples of non-price competition such as free deliveries and installation, longer opening hours (e.g. supermarkets and petrol stations),branding of products and heavy spending on

advertising and marketing.

If firms operate in cooperative mode to minimize the competitions between themselves this behavior is called as COLLUSION. When two or more firms agree to set their outputs or prices to divide the market among themselves is called as COLLUSIVE OLIGOPOLY

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. .
B.

Overt collusionwhen firms openly agree on price,

output, and other decisions aimed at achieving monopoly profits. Firms who coordinate their activities through overt collusion and by forming collusive coordinating mechanisms. Such a group of independent working in unison called as

CARTEL.
When this happens the existing firms decide to engage in price

fixing agreements or cartels. The aim of this is to maximise joint profits and act as if the market was a pure monopoly. Price fixing in collusive oligopoly

Collusion is often explained as a product of motive to achieve joint-profit maximization within a market or circumvent price and revenue instability in an industry. Price fixing can be deemed as an attempt by suppliers to control

supply and fix price at a level close to the level expected from a
monopoly.However in order to fix prices, the producers in the market must be able to exert control over market supply The figure below depicts a producer cartel fixes the cartel price at output Qm and price Pm decided by the fact where marginal revenue of the cartel MR is equal to marginal cost MC of the cartel. The distribution of the cartel output among the cartel members could be decided on the basis of an output quota system or through mutual agreement. Although the cartel as a whole is maximising profits, the individual firms output quota is unlikely to be at their profit maximising point. For any one firm, within the cartel, expanding output and selling at a price that slightly undercuts the cartel price can achieve extra profits. Unfortunately if one firm indulges in this, the other firms will probably same path same. If all firms break the terms of their cartel agreement, the result will be an excess supply in the market and a sharp fall in the price. Under these circumstances, a cartel agreement might break down.

Conditions conducive for formation of cartels

1.

Only a small number of firms exist in the industry and

barriers prevail to entry protect the monopoly power of existing firms in the long run
2.

Market demand is not too variable i.e. it is reasonably

predictable and not subject to erratic fluctuations which may result to excess demand or excess supply
3.

Demand is fairly inelastic with respect to price so that a higher

cartel price fetches increased total revenue to suppliers in the market

4.

It is easier to monitor each firms output. This enables the

cartel more easily to regulate total supply and identify firms, cheating on output quotas Reasons for possible break-downs of cartels Most cartel arrangements experience difficulties and tensions and some producer cartels collapse completely. Several factors can create problems within a collusive agreement between suppliers:
1.

Enforcement problems: The primary objective of the cartel

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is to restrict total production to maximize total profits of members. But in reality each individual member of the cartel finds it profitable to raise its own production. Thus the enforcement of output quota becomes difficult for the cartel leading disputes about o sharing of the profits. Nonmembers of the cartel may opt to take a free ride by producing close to but just under the cartel price.
2.

Falling market demand during a recession creates excess

capacity in the industry and exerts pressure on individual firms to reduce prices to maintain their revenue. E.g. collapse of the coffee export cartel
3.

The

successful

foray

of

non-cartel firms

into

the

industryundermines a cartel s control of the market

e.g. the

emergence of online retailers in the book industry in the mid 1990s

4. The exposure of illegal price fixing by market regulators Governments appoint market regulators to monitor the markets and identify the firms indulging in collusion. Collusion is undesirable from the standpoint of society as a whole,

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because inefficient allocation of resources at high prices. In order bring allocation 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.

OPEC case study : Most successful cartel

Organization of petroleum Exporting countries (OPEC) was formed in 1960. Initially it contained only 5 members, the membership of cartel however expanded to 13 by 1973. During period 1960-73, OPEC could not be reckoned as a successful cartel. In fact world oil prices declined slightly over the 1960-1970 decade. However the situation underwent a dramatic change in 1973 with the Arab-Israel war. During the war the Arab members of OPEC temporarily cut off oil exports. The outcome was ominous: Oil prices more that tripled in a matter of months. The estimated price of a barrel of oil on the world market was $2.91 in 1973 but jumped to $10.77 in 1974.This demonstrated that output restriction could wreak havoc After resuming
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exports OPEC continued to hold down output. Subsequently, oil prices remained relatively stable. However another jolt was inflicted in 1978 when revolution took place in Iran. Iranian exports at that time accounted for 20 percent of all OPEC ex-ports, fell almost to zero. Prices escalated once again and the new government in Iran continued to limit exports, maintaining prices at high levels. The Iran-Iraq War, which started in 1980, resulted in the extensive destruction of oil-producing facilities in both counties and brought down oil exports further.

The relative success of OPEC can be attributed to the

following advantages it has enjoyed relative to other cartels
1.

The price elasticity of demand for oil, especially in the short run, is quite low, implying that moderate output restrictions will produce large price increases- a favorable environment for a cartel. In 1973 OPEC output contributed to two-thirds of the total world oil production,

2.

In 1975 OPEC countries held 70 percent of the worlds proven oil resources which imparted it a substantial market power.

3.

OPEC contains a few members, many of the internal problems that usually trouble a cartel are reduced e.g.
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reaching agreements, monitoring the output and coordinating price policies of individual members, is simpler with a few members involved. In fact, since just four countries (Saudi, Arabia, Kuwait, Iran and Venezuela) regulate 3/4 of OPECs oil reserves, the effectiveness of cartel is further enhanced.
4.

The biggest danger to a cartel comes from the increased production by nonmembers. However

exploration, production and building new supplies is time consuming hence this gives OPEC significant short-run power.
5.

OPEC has also been benefited by policies of oil importing nations. for example In the United states for example, price controls on oil and gas kept the price received by domestic oil producers artificially low and discouraged production and exploration.. In addition, tough environmental restrictions on the mining and use of coal slowed the transition to coal as another energy alternative. On one hand domestic consumption was encouraged and production was discouraged resulted in additional demand for oil from OPEC and the United states inevitably became more dependent on imported oil during the 1970s.

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But the situation had changed dramatically by early 1982. In March 1982 the price for Saudi Arabian light crude oil was $29 a barrel, down in real terms more that 30 percent from a year earlier. So also the fraction of oil production had fallen to 40 percent by 1984. This ultimately resulted in erosion of power of OPEC.

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 in 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 .

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BIBLIOGRAPHY
BOOKS:MANAGERIAL ECONOMICS MODERN MICROECONOMICS NEWSPAPER:- ECONOMIC TIMES(data collected from an article captioned CARTEL PROBABILITIES IN FUTURE WEBSITES:-www.timesofindia.com/oped www.google.com/search/opec

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