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Business Economics-NMIMS

Business Economics-NMIMS

Below are mentioned the Predominant features of an Oligopoly Market and Cartel

Oligopoly is a common market form where a small number of firms are in competition. 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. For example, as of fourth quarter 2008, Verizon, AT&T, Sprint, and T-Mobile together control 89% of the US cellular phone market.

Oligopolistic competition can give rise to a wide range of different outcomes. In some situations, the firms may employ restrictive trade practices (collusion, market sharing etc.) to raise prices and restrict production in much the same way as a monopoly. Where there is a formal agreement for such collusion, this is known as a cartel. A primary example of such a cartel is OPEC which has a profound influence on the international price of oil.

Firms often collude in an attempt to stabilize unstable markets, so as to reduce the risks inherent in these markets for investment and product development. There are legal restrictions on such collusion in most countries. There does not have to be a formal agreement for collusion to take place (although for the act to be illegal there must be actual communication between companies)-for example, in some industries there may be an acknowledged market leader which informally sets prices to which other producers respond, known as price leadership.

In other situations, competition between sellers in an oligopoly can be fierce, with relatively low prices and high production. This could lead to an efficient outcome approaching perfect competition. The competition in an oligopoly can be greater when there are more firms in an industry than if, for example, the firms were only regionally based and did not compete directly with each other.

Thus the welfare analysis of oligopolies is sensitive to the parameter values used to define the market's structure. In particular, the level of dead weight loss is hard to measure. The study of product differentiation indicates that oligopolies might also create excessive levels of differentiation in order to stifle competition.

A cartel is a group of formerly independent producers whose goal is to increase their collective profits by means of price fixing, limiting supply, or other restrictive practices. Cartels typically control selling prices, but some are organized to control the prices of purchased inputs. Cartels are prohibited by antitrust laws in most countries; however, they continue to exist nationally and internationally, openly and secretly, formally and informally. It may be guilty of abusing said monopoly in other ways. Cartels usually occur in oligopolies, where there are a small number of sellers and usually involve homogeneous products. In periods of high demand, with capacity constraints, bigger firms have incentives to join the cartel as they can cut their production and maximize profits through price increase.

Cartels can deter entry for new firms through price wars. They can also use price wars to force outsiders to join the cartel or to punish existing defectors for non-compliance. Cartels can be classified as explicit or tacit, with explicit cartels referring to a situation where firms directly interact to establish the cartel, as in the case of OPEC4 Tacit Cartels in contrast describes a situation where the firms can establish super competitive prices without any direct interaction. The incentive to defect exists in both tacit and explicit cartels, unless there is a   written enforceable contract. Thus, sustainability of a cartel is an important area of study. A Cartel which is stable satisfies the property of "Internal stability" i.e. no cooperating firms find it desirable to become independent or break out of the cartel and "External Stability" i.e. no independent firm finds it desirable to join the cartel. Cartels persist among firms with similar cost functions. If the cost functions are similar, all participating firms have similar incentive to remain in the cartel.

Entry of new participants into a cartel is disruptive because it destabilizes the collusive agreement, often leading to the breakdown of the cartel or results in the cartel being discovered. Transparency in the market makes it easier for the cartel members to have access to their sales and market share data of the participating cartel members. Persistent demand instability puts a strain on the management and coherence of any collusion. High concentration of buyers, makes it difficult for monitoring the cartel, as with high buying power, buyers would buy only from a single supplier i.e. one of the cartel members creating the impression that the member has defected.

1.  Do you agree that the Indian Aviation Sector is a classic example of oligopoly as there is a hidden agreement among the existing airline Industries and their pricing structure? If yes support your answer with examples from the Industry and with the kinked demand curve diagram.

2.              How is the Price arrived at in an Oligopoly Market, depict with the help of a Diagram. Also mention the Dead Weight Loss created and the social impact on due the creation of this Dead Weight Loss.

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