Over the last 30 years, the Organization of Petroleum Exporting Countries (OPEC)
ID: 1227843 • Letter: O
Question
Over the last 30 years, the Organization of Petroleum Exporting Countries (OPEC) has had varied success in forming and maintaining a cartel agreement among members.
What are the main characteristics of a cartel?
Next, explain carefully how the following factors may contribute to the difficulty in forming and/or maintaining its price and output agreements.
a) New Oil fields are discovered and increased drilling is undertaken in the Gulf of Mexico and the North Sea my nonmembers of OPEC.
b) Crude oil is a product that is differentiated by sulfur content: it costs less to refine low-sulfur crude oil into gasoline. Different OPEC countries possess reserves of different sulfur content.
c) Cars powered by hydrogen are developed.
Explanation / Answer
Answer) CARTEL
->· Cartels with greater market share and in more highly concentrated industries endure longer than those with lower market share and in less concentrated industries. In the U.S., price fixing is more frequent (or more frequently prosecuted) in industries with fewer firms or greater concentration.
-> · Faster growth in trend demand is associated with shorter cartels, as are business cycle downturns. In general, instability in the economic environment destabilizes cartels.
-> Cartel organization and the history of the cartel are important, but difficult to measure. In the U.S., price fixing appears more frequently in homogeneous product markets, perhaps indirectly indicating that these cartels are easier to organize. Also, cartels in the U.S. often rely on trade associations to help with cartel organization when there are a large number of firms in the industry.
-> Cartels reappear in some industries, and cartel duration tends to increase with industry experience with collusion.
-> · Other than WWII, cheating is the most common cause of breakdowns in international cartels.
factors may contribute to the difficulty in forming and/or maintaining its price and output agreements.
(a) with the discovery of new oil by nonmembers of OPEC, there is increased competition. This will lead to a fall in market price and make the cartel agreement harder to maintain.
(b) The OPEC countries sell a differentiated and complex product. This complicates the decision about what prices to set for what types of oil and makes enforcement of a cartel agreement more difficult. Much of the conflict within OPEC rests on the price differential that is set between high- and low-quality oils.
(c) The development of a hydrogen-powered car would make it more difficult to form or maintain an agreement. Remember that a cartel essentially acts like a monopoly. A cartel’s (or a monopoly’s) market power is eroded if there is entry of new firms or the development of substitute products.
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