Market Structures 1

Market Structures
1
Market Structures
Market structure refers to the competitive
environment in which buyers and sellers of
a product operate.
Major Types• Perfect competition
• Monopoly
• Monopolistic competition
• Oligopoly
2
Perfect Competition
• Large number of undifferentiated buyers
and sellers
• Each one is so small as to be insignificant
to influence the market
• The seller is a price-taker
• Homogeneous products
• No barriers to entry and exit- survival of
the fittest
3
Perfect Competition
• Well organised and continuous markets
• Flexible market prices to keep responding
to changing conditions of supply and
demand
• Perfect Knowledge on market condition,
product and present and future prices,
costs and economic opportunitieseliminates price differences
4
Perfect Competition
• Perfect mobility of factors of production
(raw materials, labour and capital)-this
results in factor price equalisation.
• No Government interference: No rationing,
administered prices, subsidies etc.
5
Perfect Competition
Presumption that free market operates in social
interest• “Invisible hand” and self-regulatory mechanism
• Provides an effective check on the power of the
sellers, safeguards consumer and makes it
unnecessary for the State to intervene
• Stock market is the closest example of a
perfectly competitive market
6
Equilibrium Under Perfect
Competition
Note:
Equilibrium is at the point of intersection between
MC and MR
MC cuts AC from below at its lowest point
Firm may make profits, losses or break even in the
short run- depends on its cost of production
If firm makes abnormal profit, more firms will enterIncrease in supply- lower price and profit
Opposite in case of losses
7
Firm Making Profit in Short Run
Y
P=AR=MR as
represented by the
horizontal line
MC
AC
E
AR=MR
P
A
OP and OQ are
equilibrium price and
output.
OPEQ represents Total
Revenue
C
OACQ is total cost.
O
Q
Output
X
O
u
t
p
u
t
Here, TR>TC
PECA is the short run
supernormal profit.
8
Firm Breaking Even in Short Run
Cost/Revenue
MC
P
O
AC
AR=MR
E
Q
Firm breaks even
where AC curve is
tangent to AR. TR
and TC are the
same and given by
rectangle OPEQ.
There is neither
loss, nor profit
Output
9
Firm Making Loss in Short Run
Total Revenue=OPEQ
MC
Total Cost=OBCQ
AC
B
Loss= BCEP
C
P
AR=MR
E
OO
Q
Output
10
Case of Exit or Shut Down Point
• If prevailing market price is more than
average variable cost (AVC) of production,
the firm will continue production.
• If prevailing market price is less than
average variable cost (AVC) of production,
the competitive firm will shut down
production
11
Firm Making Loss in Short Run
MC
B
Total Revenue=OPEQ
SAC
A
TVC= OKLQ
SAVC
K
L
P
AR=MR
E
TR < TC at price OP
TFC= LKAB (Lost
entirely)
Operating Loss=
OKLQ-OPEQ = PKLE
At OP price, firm
decides to shut down.
OO
Q
Output
12
Perfect Competition
Key lessons of perfect competition for
managers
• Important to enter the market as far ahead of the
competitors as possible - when supply is low and
price is high- this requires entrepreneurial skill
• A firm earning an economic profit (as
distinguished from normal profits) can not afford
to be complacent because economic profit will
attract new entrants
• Only way for a firm to survive is to keep costs as
low as possible
13
Perfect Competition
• With growing globalisation, new
competitive cost pressures are being felt
by firms around the world
• Indian companies have the advantage of
low –cost labour but disadvantage of
technology lag
• (Obama on outsourcing)
14
Global Competitiveness Index
Market Distortions
– Efficiency of legal framework
– Extent and effect of taxation
– Number of procedures required to
start a business
– Time required to start a business
15
Global Competitiveness Index
Competition
Intensity of local competition
Effectiveness of antitrust policy
Imports
Prevalence of trade barriers
Foreign ownership restrictions
16
QUIZ
• Elasticity of demand for a perfectly
competitive firm is equal to _____.
• Free entry and exit of firms is responsible
for ________ _____
in the long run.
• A perfectly competitive firm has all the
following features EXCEPT: a) Price Taker
b) Quantity adjuster C) Perfectly
informed d) Price discriminator
17
• Elasticity of demand for a perfectly
competitive firm is equal to infinity
• Free entry and exit of firms is responsible
for normal profits in the long run
• A perfectly competitive firm has all the
following features EXCEPT: a) Price Taker
b) Quantity adjuster C) Perfectly
informed d) Price discriminator
18
QUIZ
• In a perfectly competitive market, a firm in
the long run operates at:
A) AC=MC
B) AR=MR
C)MR=MC
D) P=AR=MR=AC=MC
19
QUIZ
TRUE OR FALSE?
• The government sets the price of the
product in a perfectly competitive market.
• A perfectly competitive firm produces a
substantial portion of the aggregate
output.
• There is no cost for entering a perfectly
competitive market.
• Factors of production can freely move in 20
and out of the industry.
• The government sets the price of the
product in a perfectly competitive market.F
• A perfectly competitive firm produces a
substantial portion of the aggregate
output. (F)
• There is no cost for entering a perfectly
competitive market. (T)
• Factors of production can freely move in
and out of the industry. (T)
MONOPOLY
Features of Monopoly:
• Single seller of a particular good or service
• No difference between firm and industry
• Large number of buyers
• No close substitutes -cross elasticity of
demand is zero
• High entry barriers
• Monopolist is a price setter/maker
22
• Strength of a monopolist’s power depends
on how much he can raise the price
without losing all his customers- this
depends on elasticity of demand, which in
turn, depends on availability of substitutes
• Before liberalisation, in India telephones,
electricity, post& telegraph, oil &gas,
railways were all monopolies.
23
Causes and Forms of Monopoly
Barriers to entry• Legal: Result of statutory regulation by government:
Copy right, trade marks, government regulation, licence,
tariffs and non-tariff barriers against import of goods
• Technical; Technical know-how is available with only
one person
• Natural: Control over supply of raw materials or natural
resources such as minerals, (De Beers produced 90% of
entire world’s diamonds)
• High costs of capital investment or economies of
scale
24
Causes and Forms of Monopoly
• Joint Monopoly: Through voluntary agreement,
business companies jointly acquire monopoly
power. e.g., Trusts, syndicates, cartels
• Public Monopoly: Created for the welfare of the
public- e.g., public utilities like water supply,
electricity, railways, telephones
• Private Monopoly: Owned an operated by
private individuals or organisations- objective is
profit maximisation
25
Causes and Forms of Monopoly
• Simple Monopoly: Charges uniform or single
price for a product to all the consumers- no
discrimination between buyers or uses.
• Discriminating Monopoly : Act of selling the
same commodity produced under single control,
at different prices to different buyers or different
uses at the same time- not related to difference
in cost of production
26
• Regional Monopoly• Geographical Indication under WTO
creates a barrier for global competitors
• Covers plants, seeds, herbs etc
27
Pricing& Output Decisions Under
Monopoly
Monopolist’s demand curve is
downward sloping (AR=D).
Y
SMC
MR curve is below AR curve.
SAC
P
K
Equilibrium tis MR=MC (at E)
An ordinate drawn from E to X
axis determines profit
maximising output t OQ
L
Given the demand curve AR,
output OQ can be sold at a
given time only at one price,
ie., QL (= OP)
M
E
AR
=D
MR
O
Q
Thus determination of
outputsimultaneously
determines the price.
PLMK is the profit
X
Monopolist’s Profit
Whether a monopolist makes a supernormal
or economic profit depends on:
• Its cost and revenue conditions
• Threat from potential competitors
• Government policy.
• If monopoly firm operates at MC=MR, its
profit depends on the relative levels of AR
and AC
Monopolist’s Profit
• if AR>AC, there is economic profit
• if AR= AC, there is normal profit
• if AR<AC, theoretical possibility of the
monopoly firm making losses
Measuring Monopoly Power
• Number of firms criterion- Simplest- Fewer the
number, higher the degree of monopoly power
• Excess Profit Criterion- here, opportunity cost
of the owner’s capital and a margin for risk are
deducted from the actual profit made by the firm.
• Triffin’s cross elasticity criterion - lower the
cross elasticity of the product of the firm, greater
the monopoly power.
Measuring Monopoly Power
• Concentration ratio of an industry is used
as an indicator of monopoly power relative size of firms in relation to the
industry as a whole.
• Cn is the percentage of market output
generated by the n largest firms in the
industry
• Herfindahl- Hirschman Index(HHI) is a
measure of the amount of competition in
an industry
32
Herfindahl- Hirschman Index
(HHI)
• Measure of the size of firms in relation to
the industry
• Indicator of the amount of competition
among them.
• An economic concept widely applied in
competition law and antitrust laws.
33
Measuring Monopoly Power
• The index involves taking the market
share of the respective market
competitors, squaring it, and adding them
together.
34
Herfindahl- Hirschman
Index(HHI)
• It can range from 0 to 10,000, moving from
a huge number of very small firms to a
single monopolistic producer.
Interpretation of H- index:
• Below 0.10 (or <1,000): No concentration
• Between 0.10 to 0.18 (or 1,000 to 1,800):
Moderate concentration.
• Above 0.18 (> 1,800) : High concentration
• .
35
• The United States uses the Herfindahl index to
determine whether mergers are equitable to
society;
• The Antitrust Division of the Department of
Justice considers Herfindahl indices as
discussed above.
• As the market concentration increases,
competition and efficiency decrease and the
chances of collusion and monopoly increase.
Measuring Monopoly Power
• While the threshold is considered to be
"0.18" in the US, the EU prefers to focus
on the level of change.
• Increases in the HHI generally indicate a
decrease in competition and an increase
of market power, whereas decreases
indicate the opposite.
37
• In Europe, concern is raised if there's a "0.025"
change when the index already shows a
concentration of "0.1".
• E.g., if in a market , company B (with 10%
market share) suddenly bought out the shares of
company C (which also has 10%) then if this
new market concentration makes the index jump
to "0.172".
• This would not be relevant for merger law in the
U.S. (being under 0.18) but would in the EU
(because there's a change of over 0.025)
38
Monopoly Power
The usefulness of this statistic to detect and
stop harmful monopolies is directly
dependent on a proper definition of a
particular market
E,g., If we were to look at a hypothetical
financial services industry as a whole, and
found that it contained 6 main firms with
15 % market share each, then the industry
would look non-monopolistic….
39
Monopoly Power
But suppose that one of those firms handles 90 %
of the savings accounts and physical branches
(and overcharges for them because of its
monopoly), and the others primarily do
commercial banking and investments.
• In this scenario, people would be suffering due
to a market dominance by one firm; the market
is not properly defined because savings
accounts are not substitutable with commercial
and investment banking.
40
Monopoly Power
• The problems of defining a market work
the other way as well.
• For example, one cinema may have 90%
of the movie market, but if movie theatres
compete against video stores, pubs and
nightclubs, then people are less likely to
be suffering due to market dominance of
the cinema.
41
Monopoly Power
• Another typical problem in defining the market is
choosing a geographic scope.
• For example, 5 firms may have 20% market
share each, but may occupy five areas of the
country in which they are monopoly providers
and thus do not compete against each other.
• A service provider or manufacturer in one city is
not easily substitutable with a service provider or
manufacturer in another city
42
Case of New York City Taxi
Industry
Market Value of Monopoly Profits
• Like most US cities, New York city requires a
medallion (license) to operate a taxi.
• Medallions are limited in number and this
confers monopoly power to owners.
• Value of owning a medallion is equal to the
present discounted value of the future stream of
earnings from the ownership of a medallion.
43
Market Value of Monopoly Profits in
New York City Taxi Industry
• No of medallions in New York city remained at
11,787 from 1937 to 1996 when it was increased
by only 400 to 12,187. Value of medallion rose
from $10 to $250000 by 1999 or 18% per year.
• Proposals to increase the number of medallions
was blocked by the taxi industry lobby. If
licenses to operate were freely granted, then the
price of medallions would drop to zero.
44
Market Value of Monopoly Profits in
New York City Taxi Industry
• Instead of doing that, New York city allowed a
sharp growth in the number of radio cabs, which
can respond only to radio calls and can’t cruise
the streets for passengers.
• This sharply increased the competition in NY taxi
industry and reduced profits to the taxi owners
from 33% in 1993 to 11% in 1999
- from Wall Street Journal quoted in Salvatore
45
Discriminating Monopoly/ Price
Discrimination
3 forms:
• 1st Degree: Different rate for every unit of
output- discrimination between buyers /
between units
• Monopolist forces every consumer to part
with his entire consumer surplus-Full
benefit of trade goes to trader.
(Auction is one example, but it is for special
products)
46
2nd degree Discrimination
• 2nd Degree: Buyers are divided into
different blocks or groups and then
different rates charged for each block or
group:
• Here, consumers enjoy a part of the
consumer surplus and monopolist is also
able to get a part of the surplus;
E.g., electricity charges, Quantity discounts
47
3rd degree Discrimination
• 3rd degree: Most common type-Seller divides his
buyers into sub-markets and charges a different
price for each market• Dumping is an example: High price in domestic
market and low in international market.
• Reasons: To dispose off surplus; to remove
rivals; to take advantage of increasing returns to
scale; to create new demand abroad.
• As demand is elastic in international market, he
has to reduce price but charges a higher price in
the domestic market as domestic demand is
inelastic
48
When is Price Discrimination
Possible?
Conditions of Price Discrimination ( When is
Price discrimination possible?)
1. Consumers are unaware of the difference in
prices charged
2. Price difference so small that consumers don’t
bother
3. Price illusion/ irrationality
4. Markets are situated far from one another and
so it is expensive to transfer goods from one
market to another (Geographical distance)
49
Conditions of Price
Discrimination
5) When elasticities of demand in the two
markets are different: higher price for low
elasticity market and lower price for high
elasticity market.
6) Direct personal services such as those of
doctors and lawyers where resale is not
possible
7) Legal sanction provided by government:
e.g., lower prices in army canteen
50
Forms of Price discrimination
• Personal Discrimination: Occurs when
different prices are charged to different
consumers – doctors and lawyers may charge
different fees for the rich and the poor
• Local Discrimination: Lower prices in one
locality and higher in another. e.g., dumping by
charging higher prices in domestic market and
lower prices in foreign markets
• Trade Discrimination: Charging different rates,
based on use e.g., electricity charges for
domestic/ industrial/agricultural uses
51
Forms of Price Discrimination
• Quality Discrimination: Hard cover
editions being sold at higher prices than
paper back editions of books; business
class travel vs economy class in air travel
• Time Discrimination: Different charges
for the same commodity at different points
of time- off-season air tickets; happy hours
in restaurants
52
Indian Railway & Price Discrimination
• On the basis of passenger categories:
senior citizens, children, students,
handicapped, escorts, employees--• Class of Travel (Basis: Comfort)
• Category of Train:9 categories- rajdhani,
superfast, mail, Garib Rath, passenger,
shuttle (Basis: time taken for travel)
53
QUIZ
• TRUE OR FALSE?
• Charging different prices for similar goods
is pure price discrimination.
• Difference in elasticities is a necessary
condition for price discrimination.
• Tatkal facility provided by Indian Railways
is an example of ----------degree price
discrimination.
54
QUIZ
• Charging different prices for similar goods
is pure price discrimination (F. same, not
similar)
• Difference in elasticities is a necessary
condition for price discrimination.(T)
• Tatkal facility provided by Indian Railways
is an example of second degree price
discrimination.
55
• In comparison with a perfectly competitive
market, a monopoly market would usually
generate
• A) Higher output at higher price
• B) Higher output at lower price
• C) Lower output at higher price
• D) Lower output at lower price
56
• In comparison with a perfectly competitive
market, a monopoly market would usually
generate
• C) Lower output at higher price
57
• A monopoly is
• A) One of the few producers of a
homogeneous product
• B) A single producer of a single product
• C) One of the many producers of a
homogeneous product
• D) One of the many producers of a
differentiated product
58
59
Monopolistic Competition
Chamberlin and Joan Robinson
In reality, monopoly and competition are not
mutually exclusive, but markets have both
elements in differing degrees
Most economic situations are composites of
both competition and monopoly
60
Characteristics of Monopolistic
Competition
Large no of firms/ sellers -Consequently no
individual has any significant control over the
market
Absence of interdependence: (Independent
decision Making) -Since the number is large and
size of each firm is small, no firm can influence
or is influenced by others in the market.
Example of FMCG product market
Freedom of entry: No barriers to entry- this leads
to occurrence of only normal profits in the long
run
61
Characteristics of Monopolistic
Competition
• In Monopolistic Competition firms compete
with each other mainly not on the basis of
price but on the basis of non price
elements
• Product differentiation and selling costs
are known as non-price competition
62
Characteristics of Monopolistic
Competition
Product Differentiation: Core of monopolistic
competition- Different firms produce similar,
but not homogeneous products.
Even minor changes in the same generic product ,
by which a seller can charge a different price
e.g., tooth paste, tooth brush
Cross elasticity of demand for products is very
high (not infinite) in this market
63
Product differentiation may relate to
A) Quality, design, packaging, trade names,
raw materials used
B) Conditions surrounding sale of the
product- courteous approach, efficiency,
credit availability, after-sale service etc
64
Characteristics of Monopolistic
Competition
Product differentiation gives firms some
monopoly power i.e., power to control the
price in a narrow circle, but in the wider
circle the firm faces competition from rival
producers.
• Firms in effect are competing monopolies
65
Characteristics of Monopolistic
Competition
Selling Costs: Expenditure incurred on
changing the demand and preference of
the consumers - Expenditure on
advertising, promotion, displays, salaries
of salesmen, free samples etc.• Unique to monopolistic competition
..
66
• Imperfect knowledge- about cost, quality,
prices .
• As Joan Robinson puts it: “ the imperfect
market is characterised by distortions of
market conditions by sellers”
67
• Identification of product groups:
• A product group comprises of products
that are “good” but no perfect subsitutes
of each other.
• E.g., Lux, Lifebuoy. Dove, Cinthol can be
classified as the product group of “soaps”
• Ariel, surf, Nirma and Tide can be
classified as the product group of
“detergents”
68
Monopolistic Competition &
Advertising
• Advertising: No need in monopoly and
perfect competition
• In this situation, makes sense for the firm
to attract customers through advertising
than by lowering prices
69
Monopolistic Competition
Wastes of Monopolistic Competition
1. Competitive advertising ( as opposed to
constructive advertising) to attract
consumers to pay a premium for a
particular brand
70
• Criticised by several economists because:
• Advertising induces customers to spend more
money because of name, rather than rational
factor
• Adds no value to the product being offered
• Leads to brand confusion in the consumers
minds
• Ads by rivals may even cancel out each other,
leading to increase in the AC of each firm,
without corresponding increase in sales.
71
2. Excess capacity- resources are not fully
utilised, leading to higher costs
72
QUIZ
• Slope of DD curve for a monopolistic competition
is flatter than that of a monopoly firm. (T)
• A firm in monopolistic competition can not
practice price discrimination. (F)
• Firms under monopolistic competition will have
limited discretion over price because of
Customer loyalty.
• If a firm in monopolistic competition increases its
price slightly it will lose some customers.
73
Oligopoly: Definition and Features
• Few Sellers : Naturally each seller has a
sizeable share of market• Homogeneous or differentiated products
• Close Interdependence- decision of a single
firm to expand or contract output affects entire
market- moves and counter moves- need to
predict and analyse every possible reaction of
rivals before a firm takes decisions
• Automobiles, steel, consumer electronics
74
Oligopoly: Definition and Features
• Indeterminate demand curve: because
of extreme interdependence
• Price Rigidity- Price remains stuck at a
certain level-No desire for a departure
from prevailing price in either directionprice cutting will be followed by rival but
price hike may not be and hence “sticky”
prices
75
Oligopolistic Pricing
Oligopolistic pricing can take 3 different forms:
1. Independent Pricing
2. Collusion Model
3. Price Leadership
1.Independent Pricing: Method of pricing its
differentiated product – result of the fact that
each firm has a certain monopoly power, but
there is fear of retaliation by rivals
- Various possibilities occur: Price wars and price
rigidity
76
Collusive Oligopoly
2. Collusion Model:
• When there are only a small no of firms in a
market, they have a choice between cooperative
and non cooperative behaviour.
• Tacit or explicit collusion
• A Cartel agreement represents the most
complete form of collusion among oligopolistshere firms are in a cooperative mode and
minimise competition among themselves- due to
explicit agreement between firms –
77
Collusive Oligopoly
• Joint decisions on output / price / market share
or quotas• Example of OPEC- decides on output rather
than price-Has a board of control which
determines the market share of each member
• Sometimes tacit collusion occurs between firms
without explicit agreement- Here firms quote
identical prices
• Example: Indian cement and steel markets
78
Collusive Oligopoly
Barriers to Collusive Oligopoly:
• Considered illegal as it converts oligopoly into
monopoly
- Firms may cheat by giving secret price
concessions and thereby increasing the market
share
• Slow and lengthy process of cartel negotiations
• Rigidity of negotiated prices
- Some cartel members may be political rivals
such as Iraq, Kuwait and Iran in OPEC
79
Price Leadership
3. Price Leadership: It is an informal position in
most oligopolistic markets.
It may emerge spontaneously due to technical
reasons such as size, efficiency, economies of
scale, brand image or the firm’s ability to
forecast market conditions accurately
• Typically, leadership role is played by a
dominant firm (largest in the industry) and
smaller ones follow-(Example- Bajaj scooter,
Camlin ink)
80
Price Leadership
• Sometimes price leadership is barometric-Here
one of the firms (not necessarily the dominant
one) takes lead in announcing a price change,
especially when a change is due but is not
implemented due to uncertainty in the market –
The barometric firm is supposed to have a better
knowledge of the changing environment of the
market than others
• Price leadership often serves as a means to
price discipline and price stabilisation
81
Kinked Demand Curve
• Once a general pricing decision is taken under
any of the above models, it remains fixed for an
extended period.
• Kinked demand curve theory by Paul Sweezy
explains price rigidity under oligopoly
• 2 parts of demand curve of a firm have different
elasticities- one for price increase and another
for price decrease- Former is more elastic than
latter
82
Kinked Demand Curve
D
P
K
MC1
DK: Demand is more
elasic. Raising price
above OP will cause
sizeable decline in
demand
M
MC2
C
1
M
M
Cost/Revenue
O
The AR curve or
demand curve has a
kink at the point K at
which it operates
and price is OP.
D1
O
Q
MR
M
R
M
M1
output
KD1: Inelastic
segment. Price cut
will be followed by
rivals
83
Kinked Demand Curve
• MR Curve is discontinuous as a result of
kink in AR curve
• MC passes through the dotted portion of
the MR curve. Hence , a change in MC
has no effect on price and output
84
Industrial Concentration in US
Industry
Four Firm Ratio
Cigarettes
93
Breakfast cereals
85
Household Refrigerators
82
Newspapers
25
Men’s clothing
18
Women’s Dresses
11
85
Game Theory
• First systematic attempt was made by von
Neumann and Morgenstern
• Martin Shubik is considered the most
prominent proponent of game theory
86
• Nature of the problem faced by an
oligopolistic firm is best explained by
Prisoner’s Dilemma:
• A and B are arrested by CBI on suspicion
of involvement in a crime and interrogated
separately by the CBI, with the following
conditions disclosed to them:
87
1. If you confess your involvement in the crime,
you will get 5 years imprisonment.
2. If you deny your involvement and your partner
denies it too, you will be set free for lack of
evidence.
3. If one of you confesses and turns approver, and
the other does not, then the one that confesses
will get 2 years imprisonment and one who does
not confess gets 10 years imprisonment .
88
• Given the conditions, each suspect has 2
optionsi) To confess
ii) Not to confess
• Both have a dilemma
• While taking a decision both have a
common objective- to minimise the period
of imprisonment
89
Game Theory
• Game Theory models include players, strategies
and payoffs
• Players : Decision makers
• Strategies: Choices to change price, develop
new products, undertake new advertising
campaigns etc
• Payoff: Outcome or consequence of a strategy
• Payoff Matrix: Table giving the payoffs from all
the strategies open to the firm and the rival’s
responses
90
•
•
•
•
•
A firm needs to anticipateCounter moves by rivals
Pay-off when
a) rival firm does not react
B) rival makes a counter move by raising
its ad expenditure
91
OPEC’s Price Making Power
• 12 members- Saudi largest producer
• The Organization of Petroleum Exporting
Countries (OPEC) is a cartel of twelve countries
made up of Algeria, Angola, Ecuador, Iran, Iraq,
Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the
United Arab Emirates, and Venezuela. The
organization has maintained its headquarters in
Vienna since 1965, and hosts regular meetings
among the oil ministers of its Member Countries.
Indonesia 's membership from OPEC was
voluntarily suspended recently as it became a
net importer of oil.
92
• During 1970s undisputed power-In 1980s OPEC
was accused of behaving like a “clumsy cartel” –
• Non cooperative behaviour from members with
lower reserves such as Qatar, Indonesia and
Venezuela. Because of their lower reserves and
intention of making quick profits, these often
produced in excess of the stipulated individual
quota
93
OPEC’s Price Making Power
• When prices nosedived abnormally in
1998, OPEC successfully executed 2
successive production cuts
- But since then erosion of OPEC’s
monopoly power as a price maker
-Surge in non OPEC production and
94
OPEC’s Price Making Power
• Core problem is price of oil is no more
fixed in the spot market where physical
trading takes place but on futures market
where only paper barrels are traded
• Only an insignificant part of oil traded on
NYMEX is ever physically delivered.
95
OPEC’s Price Making Power
• Many players are involved in futures
trading that are not involved in physical
trading of crude (true of all commodities)floor traders, fund managers, refiners,
producers, financial institutions and
speculators- complicates process of
decision making within OPEC
96
OPEC’s Price Making Power
OPEC’s ability to influence prices depends on• Its ability to influence so many players, including
level of stocks and inventories that the refineries
are holding
• Size of speculative positions
• Flow of hedge funds in and out of the market
• Traders’ bearish or bullish sentiments
• Existence or erosion of spare capacity
97
Comparison of different Market
Structures
Feature
Perfect
Monopoly
competition
No of
sellers
Nature of
goods
Many
Entry
Free
Barriers
Degree of
Zero
Absolute
One
Monopolisti
c
competition
Large
Homogene Homogene Differentiat
ous
ous
ed
Unrestricte
d
98
Limited
Comparison of different Market
Structures
Feature
Perfect
Monopoly
competition
Monopolisti
c
competition
Production
cost+
Selling cost
Cost
Elements
Production
cost
Production
cost
Long run
Profits
Normal
Supernormal
Normal
Nature of
Demand
Elastic
Inelastic
Relatively
inelastic
99
Feature
Perfect
Monopoly
competition
Monopolisti
c
competition
Pricing
Price taking Pricemaking:
i) Uniform
ii) Price
discriminati
on
Pricemaking:
Uniform
price
100