Discuss the economic incentives for vertical integration (as opposed to spot markets or contracts) in the...

Discuss the economic incentives for vertical integration (as opposed to spot

markets or contracts) in the petroleum industry as the global oil market

increased in sophistication. Discuss the differences between exchanges and OTC or bilateral market

Expert Solution

As we all know, the oil industry today is more sophisticated than ever, thanks to the sanctions and a complex governance, petrodollars and many more. To leverage on all aspects, including economic incentives, vertical integration is preferred. In general, vertical integration is associated with gaining more market power and oil industry is no exception to this: that is promotion of imperfect competition in the market. Studies suggest that due to this activity in oil industry, it is able to regulate the performance efficiency of those small companies with excessive profits. Typical examples are that of the companies in the gulf.

Now let's look at the differences between exchanges and OTC.

OTC means the Over The Counter, i.e. deals with shares, equities and derivatives. Whereas exchange market is a platform where the currencies are traded. Multiple currencies are traded with each other.
OTC is decentralized, meanig there are a lot of mediators in the transaction, as against exchange market which is completely centralized meaning transactions are carried out through centralized source.
OTC is standardized, that is there is a regulatory body which overlooks of the consumer rights. In exchange markets there is no specific agreement for this purpose.
In OTC market, all the terms and conditions associated with a transaction involves only the parties involved unlike the exchange market, which is very transparent and the prices of currencies are highly visible.

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Rahul Sunny answered 2 years ago

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