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Oligopolistic Market Model and Oil Prices

 

Introduction

The Oligopoly market structure is the market which has few producers and large number of buyers which gives these producers an advantage to control the market. According to (Scholasticus, 2010), the buyers have very less alternatives and do not have enough knowledge about the market. The producers inflate the prices of their goods to attract more customers by reducing prices leading to deflated price level. Based on Scholastics writing in one of its articles, the producers have perfect knowledge of the consumers but consumers do not have any information about the producers or their act of influencing the prices has a negative effect on national economy.

Features of Oligopoly Market

There are few producers and large number of buyers. The producers deal in differentiated products. (Jayasuriya, 2011, p. 87) One of the producer or firm become the leader of the group and makes others to agree or dominates them to fix the prices which results in price leadership. The competition in an Oligopoly market is intense and both price and non-price methods are used to attract more customers. For example in lot of advertisements, producers mention ''We will not be beaten on price. The price will be matched with the competitor selling price" (Labs S. S.) In Oligopoly market, firms or producers get together to share a market and decide on prices. Because of an uncompetitive market structure, they enjoy heavy profit by raising the prices or lowering the prices to attract more customers resulting in entry barriers to this market. (Labs S. S.) According to recent study by Stanley St Labs., the competition is very different in oligopoly as compared to other markets forms. In other markets, it is violent because of the high competition to gain the market share but in oligopoly, the firms are interested to gain the market share by collaborating to earn heavy profits. Firms are mutually interdependent which means if one firm changes its prices, it will affect the sales of other firms.

According to (Stewart & Rankin, 2008, p. 141), the oligopoly market structures have kinked demand curves and the demand curve for the product has two sections called inelastic and elastic section.

OPEC: Oligopolistic market model

The Organisation of Petroleum Exporting Countries or OPEC is an oligopoly market which is dominated by the Arab oil producers as they hold the maximum amount of oil refineries which gives them an opportunity to dominate others and decide on prices. Cartel is another name for an oligopoly of producers of a commodity. (About Opec, 2011)
The Members of OPEC tries to influence the world oil prices with the consent of all and they set the production quotas and become an effective cartel by restricting the sales. They deeply analyse the current market situation and anticipate future demand and supply to see various fluctuations of prices in the markets. After analysing the market scenario, they decide to raise or lower the oil production as agreed by all the members to maintain price stability and make the oil available for consumption. (corporation, 2003-2011)
According to (Oil :Crisis and Collusion, 2011), OPEC was organized with the purpose of manipulating the oil prices by controlling oil supplies to the market.
It controls approximately 80% of the world's oil reserves and 40% of the world's production among their 12 member states. As discussed earlier, it is dominated by Gulf States who can easily turn the taps on and off when required to influence the market prices. Even when the economy was facing an issue of recession, it did not have any effect on oil industry and were still making heavy profits.
Hence, we can say that OPEC does play an important role in making decision of oil supply to the market which may affect the oil prices in a greater extent. The members have larger number of oil reserves and can increase or decrease the production or supply whenever they want. As they very well know that all the developing and developed nations wants oil and has almost become the necessity of life like food in today's lifestyle, so they try to earn as much as they can by controlling the prices with the kind of power they hold in their hands.
However, we may say that OPEC has oil reserves and cannot produce more oil as they do not have any more oil reserves as overestimated by us. There can be lot of other reasons as well which may give rise to the oil prices like any commodity price fluctuation due to the demand and supply effect. (Savage, 2008)

Advantages and Disadvantages of Oligopoly Market Structure


The cost of a service of product in under oligopolistic tend to be lower in comparison to that of a monopolistic firm, but more than a competitive market. There is stability in pricing; however the prices would lead to reduction if any other firm reduces. This will impact the profitability of the companies giving a benefit to the customer.
As there are barriers to join oligopolies, it gives the firms cost advantages. This is because they would cater to mass production. Consequently it encourages having highly competitive production processes which than improvises the service delivery. (William Boyes, 2008)
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