OPEC CARTEL Essay

OPECAs aCARTELThere atomic number 18 two kinds of peak commercialise place structure and they argon perfect aspiration and washy competition. In a perfectly competitive market there atomic number 18 many numbers of sellers and many numbers of buyers selling and postulate homogeneous results, thus there is very little impact of a single buyer or seller changing the hurt of his/her product. In an imperfect competitive market there are a couple of(prenominal)er sellers and these sellers ache some(a) control over the impairments and output of the product. Here, in this kind of market the full-page market is affected by an individual changing his/her product price. In USA most of the industries fall between these two extreme market structures. But in this essay well talk most oligopoly. It is imperfect competitive market state therefore here there are few no. of sellers.Oligopoly covers many kinds of industrial doingss and structures because of its broad nature. Ol igopoly is a market condition where few numbers of sellers (oligopolists) come together and clear a market or an industry. An oligopoly may turn out 2 firms or 20 firms, selling and producing differentiated or undifferentiated products and services. There are few participants in this market structure therefore each participant is sensible about the activities of former(a) participants.The decisions are influenced by ane a nonher. As this market is operated by few firms, the price of the product and the standard of performance is firm by the firms itself retentiveness in mind their self-interest and self-respect. Sellers (oligopolists) are playing and cooperating interchange satisfactory a monopolist producing a small add up of quantity of goods and selling these goods at a price utmoster than the marginal cost. These are some of the military unitful incentives at work which hinder a assemblage of firms from maintaining the monopoly outcome.An oligopoly is operated un der imperfect competition they follow a kinked select submit which shows that ine farthermosticity below the market price and elasticity in a higher place the market price, fling differentiated services and products they induct strong barriers to entry. Kinked demand curve is down(prenominal) sloping curve. There is a discontinuity at the bend the kink. receivable to this there is a discontinuity in the marginal revenue curve. The demand above the kink is relatively elastic, therefore all other firms prices remains unaltered and demand curve after the kink the demand go away be inelastic, therefore all the firms forget have similar price cut, finally leading to a price warfare. The best way to overcome this both(prenominal)er is to produce at the point E that is the equilibrium point and, coincidently the kink point.There are many industries in oligopoly conditions are automobile, cigarette, malted beverages (beer), small arms ammunition, petroleum and petroleum, etc. T here are many kinds of oligopolies, a number of different oligopoly models have been structured. But we are expiry to further discuss about the structure of CARTEL. But before that if u examine all oligopoly models have a similar matter i.e. The conduct of any given oligopolistic firm depends on the doings of other firms in the industry comprising oligopoly. gibe to the traditional economic theory the producer who is at the stage of lucre maximizing and besides has some market power (either due to oligopoly or monopolistic competition) would have set marginal cost equal to marginal revenue i.e. MC=MR.A reliance is an face of independent firms coming together, to control and limit the production and adjoin and fall down of price and profit. Cartels can be formed in an informal or formal manner with the agreement of every ingredient. Cartels usually occur in an oligopolistic industry. The main aim of trust is to increase individual net income by reduce competition. There are two kinds of covenants Private compacts and Public cartels. In a open cartel there is involvement of government and such(prenominal)(prenominal) cartels are legally formed. Private cartels are formed by few industries and are subject to legal liability under antitrust laws this instant lay down in every country of the world.Private cartels have to very much face competition laws. Private cartels are recognized and fragmented by the competition policy by most of the countries in the world. But decision out cartels and further proving them is very difficult because firms are not so careless to put such agreements on papers. Antitrust authorities have found that in last 200 days price increase achieved by cartels is almost 25%. There was a 28% price hike in backstage international cartels (cartels formed by single or much nations). Domestic cartels where at 18%, less than 10% domestic cartels failed to raise the market price. This study was possible after several(prenomi nal) economic studies and legal decisions.There are some differences in habitual and private cartels. It is said that public cartels are less harmful than private cartels because they are operated in the presence of government private cartels are to a greater extent than effective and, hence, possibly harmful, though there is no proof to register this remediate. Government has all the authorities to establish and enforce the rules relating to prices, output and other such matters this is in the case of public cartels. Examples of public cartels are exportation cartels and embarkping conferences. There are similarly depression cartels permitted in some countries this type of cartel helps in stabilising the required price and production. For example, in Japan such type of cartel is allowed in steel, aluminium smelting, ship building and various chemical industries.In join States during the time of broad depression of 1930, in industries such as coal mining and vegetable ano int color production public cartels were allowed by United States and they also remained after the innovation War-II. Germanys economy was also affected by these cartels during the interwar plosive. There were international cartels formed between governments of some nations by subscribe an agreement it was called as international commodity agreement which covered products such as coffee, sugar, tin, and vegetable oil color (OPEC). Private Cartels are having huge different than public cartels, an agreement is signed on name and conditions that provide mutual advantages, these terms and conditions should not be detected by outside parties. Private cartels are responsible for violating the antitrust Laws.Game theory means studying the oligopolistic behaviour of a series of strategic actions of a firm and reaction of the equal firm. According to this theory cartels are unstable, due to the behaviour of members of a cartel is like the behaviour of a player who has a dominant str ategy in a game. If a member does not abide by the rules in the agreement that member will make more profit than by chase the agreement. The situation would be worse if all the partners moisten the agreement. Cartels do not sustain for a long run because members have cheating incentives.A Cartel can exist for scarcely 5 to 10 years this was found by deep study of cartel. If the members stipulate to cheat on the agreement in order to sort out unawares term profit so that they could cover the long term losings this depends on the situation if they have short term profits d wizard break down of cartel than theyll possibly break it down. How difficult it would be for a firm to, find out that other firms are following the agreement or not. If the other firms are not following than they are cheating and therefore the cartel becomes unstable. There are few slipway to keep watch on a cartel 1) Number of firms in the industry, 2) Characteristics of the products s hoar by the firms, 3 ) Production cost of each member, 4) Behaviour of demand, and 5) frequence of sales and their characteristics.The Organization of Petroleum exporting Countries (OPEC) was initially created with efforts of 5 countries and thence later on joined by 9 other countries. It is an intergovernmental agreement which was formed by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela, on September 10 14, 1960, in Baghdad. These five founding members were later on joined by golf club other members Qatar (1961), Indonesia (1962-2009), Libya (1962), United Arab Emirate (1967), Algeria (1969), Nigeria (1971), Ecuador (1973), Angola (2007), Gabon (1975-1994). Ecuador suspended its membership from December 1992 October 2007. initially headquarter of OPEC was in Geneva, Switzerland, and after 5 years it was moved to Vienna, Austria, on September 1, 1965.OPEC was found with some objectives. The objective of OPEC is to manage and unify petroleum polices among member countries and thereby secure the sta bility in the prices for petroleum producers. It was necessary that flowis maintained in affixing petroleum at an economical rate, to the consuming countries, provided that the members expend in this industry get a fair return of capital. They also have a unique strategy that is allotting the production quota to a member country. This system helps in maintaining and stabilizing the price to a certain level. maturation its collective vision with some objectives and creating its secretariat, in Geneva and then in 1965, in Vienna, OPEC adopted a Declaratory Statement of Petroleum indemnity in Member countries in 1968. This policy stated that it is absolute right of the member nations to have a permanent rule over their intrinsic resources and use them in order to increase the rate of national development.During seventies OPEC became an international importance in the world market of petroleum and down-to-earth oil, it had a full control over the pricing. During this period ther e was a steep price rise in petroleum products. In mid-eighties the prices began to fall down as people started shifting from petroleum products. OPECs market share fell heavily to the third of the early rise. At this time member countries had to bare a moody loss, but curtly they regained their position with a little price hike almost fractional the early rise. OPEC started recovering its market share slowly. During the period of 1990s OPEC had a fall in prices same as it had in 1980s, but it had a solid recovery this time. During this period the prices were stable at some terminus than in 1970s and 1980s. One of the member nation left OPEC and one suspended its membership. In 21st century OPEC had an innovative plan which helped in stabilising the prices of petroleum products in early years. The prices began to rise from 2004 and still its rising. During this decade one member activated its membership and another member suspended it.OPEC has not proved to be a triple-crown c artel because it was unable to control the prices of petroleum products. Though OPEC had few members and that helped in minify the conflicts. It was easy for the members to monitor one anothers activities and thereby adhering to the agreement. It was also easy to coordinate the price policy and the output policy gibe the agreement. It is simpler to form a cartel with few members. OPEC as a cartel is working effectively because 3/4th of its oil reserve is modulate by four countries they are Venezuela, Saudi Arabia, Kuwait and Iran. There is only one threat to OPEC as a cartel, and that is increased production bynon-members. In the short run the price elasticity of demand for oil is quite low, according to this statement if enough production restrictions are implied than it will give a price hike this is a favourable surround for a cartel. Following this in 1973 OPEC contributed to two third of the total oil production of the world. Today if we compare the prices of oil color oil than they are much higher than the early stages.To survive for such long period of 50 years OPEC had to face many challenges to fulfil its objective. The first challenge in front of OPEC is how to overcome the problem of supply of ill-mannered oil in all the countries keeping in mind the interest of the member countries of OPEC. Initially OPEC used to supply its common oil to all type of countries like developing countries, under developed countries and developed countries but later on it was not able to fulfil the demand as it kept on increasing. Therefore, OPEC decided to first fulfil the demand of those countries with greater need and who provided with a fair deal and then look forward to those countries that had less demand for unprocessed oil and offered a cheap deal. This decision was taken keeping in mind its own profit.The second challenge for OPEC is the NON-OPEC countries i.e. countries which are not members of OPEC. If these countries started production at high rate th en these countries would take the major market share of OPEC and that was not good for member countries. NON-OPEC countries had no restrictions in production and pricing of crude oil. These NON-OPEC countries would take the short run profits because they can vary their prices. The third problem faced by OPEC is that United Nations (UN) was constantly pressuring OPEC in order to stop the wastage of gas which is emitted in high amount due to the usage of old technology. Technological issue is the after part challenge for OPEC because they used old technology and to install new one it would take time and the market demand would not be fulfilled. update the technology was a commodious issue.The fifth issue was about maintaining boastful reserves of crude oil in order to sustain the choppy shift in demand. The sixth that is the last challenge is in the form of question that how OPEC can overcome the financial problems occurring during the production of oil because producing oil need s heavy capital investment? There is a big risk taking and uncertainties involved in this process and these uncertainties can be overcome with the help of properplanning. If OPEC is unable to fulfil the challenge than there, is a fear of losing the whole market share against the NON-OPEC countries.Analysis of OPECs behaviour can be done through certain aspects. First, relying on a structural model is better than relying on the estimation approach. According to the psychoanalysis done in first step, in last 25 years all the theoretical models constructed for OPEC should be taken and then they should be justly tested. After this we compare and contrast it with equilibrium model of dynamic oligopoly. In the second step we consider organization as a whole and not considering the supply functions of individual countries. By doing this we would be able to calculate the connivingness of OPEC. This helps us in identifying the switching periods between collusive and non-cooperative behav iour. OPEC has its own collusive behaviour and in many cases there was break down and price war between member countries.Price of crude oil depends on the demand and supply of it. There can be different variations peradventure low or high, in price of crude oil, due to the derangement in demand and supply maybe little demand and more supply or more demand and little supply. The price of crude oil will be high if demand is more and supply is less and price will be low if supply is more and demand is less. Sometimes the prices fall down due to the non-cooperative act of members of OPEC or due to going against the agreement and cheating. Sometimes the reason for high price of crude oil may be other factors like taxation, governments of the countries of the world, rude(a) disasters, etc. Factors like transportation, climate, capital, machinery, cost of production, etc. affect the prices of crude oil.As other cartels, OPEC also tries to raise the prices of crude oil by reducing the q uantity of production of crude oil. When the price raises each member of cartel wants to increase the production by going against the agreement, so that they can get large amount of profit. OPEC member countries frequently agree to the reduction of production but then they cheat on the agreement. During the period of 1973-1985 OPEC was successful in maintaining the high-prices of crude oil, with the help of cooperation ofmember countries. The price of crude oil per bbl rose steeply from $3 per position in 1972 to $11 per barrel in 1974 and then to $35 in 1981. After that there was absence in maintaining cooperation between member countries due to the argument on the subject of increasing production. Due to this the prices of barrel fell down by $13 per barrel in 1986. In this case OPEC has failed to work effectively because it was lack in coordination and cooperation between member countries and this resulted in the instability of price of crude oil.According to the study there are approximately 1.5 trillion place of oil reserve in world. Out of which 81.33% i.e. 1193 billion position, is with the member countries of OPEC. In 2010, OPEC member countries produced 29.2 million barrels per day of crude oil that is about 41.8% of the world total output this has increased to 69.7 million barrels per day. According to OPEC they have sufficient crude oil reserves that can last for 112 years. According to OPECs World Energy Model (OWEM) the demand for crude oil in 2006 was 84.7 million barrels per day. Due to the continuous growth in worlds economy the demand for crude oil in 2015 will rise to 96.1 million barrels per day, 102.2 million barrels per day in 2020 and 113.3 million barrels per day in 2030.OPEC as a cartel was unsuccessful to a certain extent and successful to a certain extent. There was high variation observed in prices of crude oil due to the instability of the Organisation of Petroleum Exporting Countries (OPEC). Lack of cooperation and coordinat ion amongst the members of OPEC was seen because each individual member was tempted to earn high amount of profits and therefore he/she would cheat with the agreement. There was one thing observed that, when the price of crude oil rise than the members of OPEC intend to go against the agreement and they try to increase their production in order to earn short-run high profits. During any crisis in the world OPEC was not able to keep itself steady. There were some technological related issues with the members of OPEC. They used the old machinery to produce the crude oil and to overcome that they started updating their machineries, but during this period they were unable to handle the market demand for crude oil and therefore they failed to provide it to othercountries which resulted in price hike. If innovation is carried out correctly than the cost of production will reduce to certain point and this will react in high rise in demand in international market, which will directly affec t the profits of members of OPEC.In termination I would like to say that OPEC is a best form of oligopoly and both suit to each other because of the continuous development of OPEC as a cartel. In past 50 years OPEC has faced many heavy tasks it failed to fulfil some tasks but still tried to recover the losses. OPEC has the largest oil reserve in the world. Amongst the NON-OPEC countries main competitor of OPEC is U.S.A because it has one of the largest reserves of crude oil. If we see in todays market than OPEC as a cartel has a higher market share and it is the longest and largest animation oil producing organization. OPEC is one of the longest survived cartels in the world.REFRENCE1) http//en.wikipedia.org/wiki/Cartel2) http//www.opec.org/opec_web/en/about_us/24.htm3) http//www.scribd.com/ physician/55875469/Oligopoly-OPEC4) http//www.opec.org/opec_web/en/press_room/179.htm5) Principles of Microeconomics (Indian edition) 4th edition, by N. Gregory Mankiw, published by Cengage le arning India Pvt. Ltd., 356-3576) Principles of economics 8th edition, by Karl E. Case and Ray C. Fair, published by Dorling Kindersley India Pvt. Ltd., 310-311