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Monopoly, Oligopoly, Cartel and OPEC

Using the Cybrary, the Internet, and your course materials, find websites that offer this information and answer the following questions.

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

6. 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.

Solution Preview

Please see response attached for full response, active links and best formatting (some of which is presented below). I hope this helps and take care.

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.

Let's look closer at the difference between the three market structures, including examples of each BELOW:

Example: (Excerpt)

In reality, no such thing as a true perfectly competitive market exists. There are other types of market structures, however: monopoly, oligopoly, and monopolistic competition.

A monopoly is a market structure in which there is only one single company that is in the industry. An oligopoly is a market structure in which there are a small number of interdependent companies in the industry. Monopolistic competition is a market structure in which many companies operate independent of each other (although not so many as to be the number approaching infinity specified by perfect competition) in an industry. There have been indices of market structuring developed over time. We measure how much of an industry is concentrated in the hands of a small group of companies. This tells just how competitive an industry really is.

What kind of market structure an industry is accounts for how companies operate within it. Unregulated monopolies with no government ties can generally do whatever they want. After all, there's no one else to offer a different sort of service or a different price. In oligopolies, there are few companies so if you were a company and you made some sort of decision, it will always be made to be a strategic tactic made to outmaneuver your rivals. In monopolistic competition, there are too many companies and so you would just think about yourself and attract customers because what you do will not affect anyone else.

In monopolistic competition, there are many firms vying for control of one market. Each firm offers a different type of product, as opposed to perfect competition in which all offer the same product. Each firm, then, has a monopoly in the market of their own product. Thus, the firms try to advertise their products so people buy more of their product. At the same time, monopolistic competitors do not try to compete so as to undermine other competitors. There are too many other businesses in a monopolistic competition to worry about them; you simply try to get people to buy your own product as opposed to respond to others' tactics.

Monopolistic competition, because there are so many relatively weak firms, there are no barriers to entry. Companies can enter the market relatively easily (although, of course, not as perfectly easy as in perfect competition). This makes for a long-term equilibrium competition of no profit. When there is profit to be made, just as in perfect competition, new companies come in and take that profit away through expanded production and dropping prices. Unlike in perfect competition, though, monopolistic competition has a normal downward-sloping demand curve. The competing companies in monopolistic competition are not so much price takers as price setters and thus the demand curve is sloped, not set constant at the market price.

The primary property of oligopoly is a small number of competing firms. Thus, to be able to best compete, firms make decisions based on planning against their rivals. That is the key property of oligopolies: all firms in oligopolies execute strategic planning. Sometimes, a market is only an oligopoly in theory. Some oligopolies act as cartels, in which many firms act as one. There are technically several firms but they all confer together to act as a monopoly. This practice is illegal in many places, though it still does happen. Even though the cartel model is no longer prevalent, there is implicit collusion. In implicit collusion, many firms will follow each other in making decisions, though they are not really meeting. For example, when one firm drops its prices, all the other firms follow suit.

For example, another possible model of oglipoly is the contestable market model, in which firms make decisions based on barriers to entry and exit. In this model, oglipoly companies make decisions so that new firms cannot enter the market. Oligopoly economic models really involve pre-existing business conventions that are basically unwritten laws that oligopoly companies just follow. Oligopoly companies on a small scale often use the cartel model, though ...

Solution Summary

By example, this solution explains the difference between a monopoly and an oligopoly, and a cartel and also discusses the welfare effects of monopolies and oligopolies. The game theory and the purpose of OPEC is also explained, including a discussion about what has happened to oil prices over the past five years and if OPEC will take over the next year.

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