Question

QUESTION

1. Identify several cartels in the world and determine to what extent they are successful.
2. The ability of oligopolistic firms to engage successfully in collusion depends on a number of factors. Identify and examine at least FIVE (5) of these factors.

Answer 1

Oligopoly is the form of market where there are few firms that is from 2 to 10. In such a case is firm has control over the market share which could be in terms of price .One way in which oligopoly can have maximum market share and influence prices and output to maximize profit is by forming cartels.

a) One of the famous cartels in the world economy has been OPEC. It was formed in 1960 by five countries i. Its main aim was to provide stability to both prices and supply of oil in the world. It influence the world prices for oil for decades but due to the expansion of other oil producing Nations, the member countries felt the need for increasing their self interest bye either opting out of cartel or increasing the supply outside the cartel which was responsible for the weakening of the cartel.

Another example is De beers diamond mines . This diamond cartel was formed in 1888 and was successfully able to influence supply of Diamonds in the world. In the early 20 th century it had about 90%of the world share of diamonds. It is still successful because of inelastic prices, less substitutes and barriers to entry and owns about 2/3rd of the market share of diamonds.

Another example is International bauxite association which was similar to Opec but failed because of the fact that there were many substitutes of bauxite in terms of suppliers.

b) The factors on which the ability of oligopoly firms to engage collusion depends are

1) Number of firms in the cartel: If the number is firms is less, it is more efficient cartel for the firms because each has more share in the cartel and more power to influence decisions and there is less is differing opinions.

2) Product type: Another factor in which collusion depends is product type ie whether it is a perfect substitute or not. If it is perfect substitute and the cartels contain all those firms having that perfect substitute, the cartel would be more effective because then the rest of the market would have imperfect substitutes and hence the cartel would be able to influence prices because price elasticity would be less

3) atleast a few firms should be able to reduce production when needed . This is because oversupply of that good would reduce the price and hence profits which would fail the whole process of cartel formation.

4) Retaliation threat: The firms forming cartel should have the trust on the partner firms in issues like retaliation. It is often seen that firms or members tend to supply outside the cartel or resort to unethical practices outside the cartel which reduces the control of cartel on market prices.

5) Barriers to entry: In order to have effective cartel , it should be seen that the non cartel firms have high barriers to entry in the market. This would help maintain the supply of good in the market. When a large nunber of firms are present in the market, there share reduces and they are less able to influence the supply in the market.

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