Topics: Cartel, Oligopoly, Supply and demand Pages: 3 (903 words) Published: December 18, 2008
Oligopoly is a market structure in which only a few sellers offer similar or identical products. It is an intermediate form of imperfect competition. OPEC is an epitome of Oligopoly. Features of Oligopoly:

Non Price Competition
Interdependent decision making
Entry Barriers
If organizations behave in cooperative mode to mitigate the competitions amongst themselves it is called Collusion. When two or more organizations agree to set their outputs or prices to maintain monopoly it is called as collusive oligopoly.

OPEC acts as a cartel. If OPEC and other oil exporters did not compete, they could ensure much higher prices for prices for everyone. Output quotas of its members produced staggering price increases (from $1.10 to $11.50 per barrel in the early 1970's, and up to $34.00 in the late 1970's: an increase of 3400% in ten years).

The relative success of OPEC can be attributed to the following advantages it has enjoyed relative to other cartels:

1. The low price elasticity of oil demand implies that moderate output restrictions increases price in short run - a favorable environment for a cartel. In 1973 OPEC output contributed two-thirds of the total world oil production.

2. In 1975 OPEC countries had a substantial market power of 70 %.

3. The effectiveness of OPEC is further enhanced since just four countries (Saudi, Arabia, Kuwait, Iran and Venezuela) regulate 75% of OPEC’s oil reserves,.

4. Exploration, production and building new supplies is time consuming and this mitigates the threat of any challenge to OPEC from increased production by non members.

5. Policies of oil importing nations like US have benefitted OPEC e.g. low prices discouraging production and exploration ;environment restrictions on the mining and use of coal slowed the transition to coal as another energy alternative. On one hand domestic consumption was encouraged and production was discouraged resulted in additional demand for oil from OPEC and the...
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