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    Monopolies & oligopolies

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    You have been contracted by an economic consulting firm to determine the economic structure and possible future actions of OPEC, the Organization of Petroleum Exporting Countries.

    1. Explain the difference between a monopoly and an oligopoly, and a cartel.

    2. Provide an example of a monopoly, an oligopoly, and a cartel.

    3. Discuss the welfare effects of monopolies and oligopolies.

    4. Explain the game theory.

    5. Using your own words, discuss the economic purpose of OPEC.

    6. What has happened to oil prices over the past five years?

    7. Based on your answers to the above questions, synthesize the information you have gathered and tell the economic consulting firm which actions you think OPEC will take over the next year.

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    Solution Preview

    In economics, a monopoly (from the Greek monos, one + polein, to sell) is defined as a persistent market situation where there is only one provider of a kind of product or service. Monopolies are characterized by a lack of economic competition for the good or service that they provide and a lack of viable substitute goods.

    Monopoly should be distinguished from monopsony, in which there is only one buyer of the product or service; it should also, strictly, be distinguished from the (similar) phenomenon of a cartel. In a monopoly a single firm is the sole provider of a product or service; in a cartel a centralized institution is set up to partially coordinate the actions of several independent providers (which is a form of oligopoly).

    A monopoly based on laws explicitly preventing competition is a legal monopoly or de jure monopoly. When such a monopoly is granted to a private party, it is a government-granted monopoly; when it is operated by government itself, it is a government monopoly or state monopoly. A government monopoly may exist at different levels of government (eg just for one region or locality); a state monopoly is specifically operated by a national government.

    An example of a "de jure" monopoly is AT&T, which was granted monopoly power by the US government, only to be broken up in 1982 following a Sherman Antitrust suit.

    An oligopoly is market form in which a market is dominated by a small number of sellers (oligopolists). The word is derived from the Greek for few sellers. Because there are few participants in this type of market, each oligopolist is aware of the actions of the others. Oligopolistic markets are characterised by interactivity. The decisions of one firm influence, and are influenced by, the decisions of other firms. Strategic planning by oligopolists always involves taking into account the likely responses of the other market participants. An oligopy is a form of economy. As a quantitative description of oligopoly, the four-firm concentration ratio is often utilized. This measure expresses the market share of the four largest firms in an industry as a percentage. Using this measure, an oligopoly is defined as a market in which the four-firm concentration ratio is above 40%. An example would be the supermarket industry in the United Kingdom, with a four-firm concentration ratio of over 70% and the brewery industry also in the U.K has a four firm concentration ratio of a staggering 85%.

    In an oligopoly, firms operate under imperfect competition, the demand curve is kinked to reflect inelasticity below market price and elasticity above market price, the product or service firms offer are differentiated and barriers to entry are strong. ...

    Solution Summary

    Monopolies & oligopolies are contrasted.