Economic Structure of Opec

The Economic Structure of OPEC

For: Professor John Zink

BUS 610-0703B

Economics for the Global Manager

By: Maria A. Journiette

August 31, 2007

Many companies operate under a monopoly which gives them an edge or a corner on the market. In this discussion we will focus on the differences between a monopoly, oligopoly, and a cartel. We will also look at what game theory is and its affect on monopolies and cartels and the welfare affect of each of the above mentioned.

A monopoly is defined as, "sole control of a particular line of goods or services in a given market or the means to control distribution and price."(Webster's, 2000) In a monopoly situation there is only one person with a particular good or service and because of this they can price their product accordingly. A good example of a monopoly in the Cincinnati area is the local grocery chain Kroger's which is headquartered in downtown Cincinnati, Ohio. Other grocery chains such as Biggs's and Meijer's were not able to build in certain areas near where a Kroger's store was already located. For many years Kroger's was the largest grocery chain in the area and many of their products were overpriced because they were the only store that sold certain items. Another example would be the cable company or provider in your area, here Time Warner is the only cable provider in the Cincinnati, Kentucky, and Dayton area. An oligopoly is defined as, "a market that is dominated by a few large suppliers."(Webster's 200) A great example would be the automobile industry. The parts needed are usually supplied by a large supplier such as Delphi with the Chevrolet and GMC automobiles. Other suppliers just do not carry or make the parts they demand.

A cartel is a "combination of independent commercial or industrial enterprises designed to limit competition or price fixing."(m-w.com, 2007) A great example of this would be the telecommunication industry and the continuous merging. Let's say for example the merger between AT & T and Cingular wireless. This merger limited some of AT & T's competition and cut down on price fixing. The main thing that comes to my mind when the word cartel is mentioned is the Columbian drug cartel. Being that most of the drugs are grown and shipped in from the Columbian borders, it gives them a corner on the market. They have the supply and other drug lords or drug dealers demand the drugs. With the demand being so large and the Columbians having the largest supply they can charge the prices that they feel fit to a degree and the drug lords and dealers are willing to pay it and pass the increased cost on to those buying the drugs from them. Let's not forget that all of this activity is strictly prohibited and illegal.

Another good example of all of the above mentioned is the oil and petroleum industry which is largely regulated by OPEC. OPEC stands for Organization of Petroleum Exporting Countries. OPEC is a very successful cartel which monopolizes both the market and its consumers.

Monopolies and oligopolies have a welfare effect on can go either way depending upon the consumer and their choices. When the demand for the product is higher the effect would be negative for the consumer. On the other hand if the supply is higher than the demand then