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    Monopolies, Oligopolies, and Cartels

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    Explain the difference between a monopoly and an oligopoly, and a cartel.
    Provide an example of a monopoly, an oligopoly, and a cartel.
    Discuss the welfare effects of monopolies and oligopolies.

    Explain the game theory.
    Using your own words, discuss the economic purpose of OPEC. What has happened to oil prices over the past five years?
    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.

    Summarize your research findings.

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    Solution Preview

    A cartel is a small group of sellers who have similar products that collude to sell the product to the market at an agreed upon price. Individual sellers in a cartel always have motivation to break the agreement (lowering their prices to gain market share) but don't out of respect for the arrangement.

    An example of a cartel is DeBeers. DeBeers is a group of diamond sellers that collude to keep diamond production low in an effort to maintain a high price for their products.

    A monopoly is similar to a cartel in that price fixing occurs, but a monopoly exists when one organization (as opposed to a group of a few) has enough market share (approaching 100%) that it can influence prices and availability of its products.

    An example of a monopoly was Standard Oil. Before the company was broken up by the government in 1911 for antitrust law violation, the company controlled 91% of all oil production and 85% of final sales. The company not only controlled oil production, it also had taken over railroads and pipelines and worked hard to keep others out of the market.

    An oligopoly is similar to a cartel in that a handful of firms control a large portion of the market (the general consensus is four firms controlling 40% or more of the market), but no price fixing or collusion exists. In other words, a few firms control the market but compete amongst one another and do not settle on an agreed upon price.

    An example of an oligopoly is the film industry in the United States. Six studios, Sony, Fox, Miramax, Warner, Paramount, and Focus, receive 90% of all film revenues ...

    Solution Summary

    The solution describes the similarities and differences between monopolies, oligopolies, and cartels and discusses OPEC.