Oligopoly Is an Imperfect Competition - Coursework Example

?Running Head: Economics Economics [Institute’s Economics What market structure is illustrated in the article? The article talks about Oligopoly. It is the theory of an imperfect competition. In an oligopoly, there are a few competitors and at least two firms have control over the whole market. The article above states that there are 6 major companies, which dominates the agricultural chemical market, therefore, this shows that there are a few firms between which shares a large proportion of the industry (Lipsey & Chrystal, pp. 176-177, 1999). In an oligopoly, the firms might produce a virtually identical product that in this case is the agricultural inputs such as the world’s seed, pesticides, and biotech industries. ‘Much of the competition between these oligopolistic firms is usually in terms of marketing of their particular brand’ (Sloman, pp. 197-198 2008), although the marketing techniques may differ considerably from one industry to another. There is a huge deal of interdependence between firms in an oligopoly. The abstract tells us that they have power in many ways in terms of regulating prices and agreements. The decisions made by the rivals will affect each firm. Firms, hence affecting their decisions recognize this interdependence (Sloman, pp. 197-198 2008). 2) Explain two reasons for your answer in question 1? It is an understanding that the type of the market structure is oligopolistic because of the fact that a few numbers of firms have a larger share of the market. In addition, when there are collusions as in the above case, so it shows that the type of market structure is oligopolistic. In addition, all the six companies mentioned do not always compete aggressively (Bianco, 2011). It has been an observation that the companies have merged/collusion, which is done only in cases of an oligopoly where there are a few number of firms and they have a considerable, share in the market. It shows that ‘the policies of each company greatly influence those of the other firms, because of the few sellers present’ (World Book, Inc, pp. 735, 2007). 3) What are the 6 Firm concentration ratios for the global pesticide industry? The global pesticide industry (Swanson, pp. 52-59, 2002) is expected to have a larger ratio in the market because there are these 6 large firms only which have an edge over the market. It is expected that they will have a monopoly due the collusions that have taken place. This will result in an extensive market share (Leiberman, pp. 23-25, 2007). 4) What is meant by a cartel? Cartel is a form of collusion. There are other type of collusions like the horizontal and the vertical collusion, and the joint product development (World Book, Inc, pp. 251, 2007). It is an association that is formed by various producers of a particular industry to control the market for their product. By restricting the available supply, the selling price is usually raised in a cartel. Usually, a cartel consists of privately owned companies in one country or another. Some governments may also form a cartel. In order to succeed, a cartel should be having a few members. However, the cartel must include all or most of the producers in a country to have monopoly in the product. It is necessary for the product to have less substitutes and it is favorable of the product is scarce (World Book, Inc, pp. 240-242, 2007). Like the case of chemical industry in an agriculture market. In a cartel, the selling price of a product is usually set at a higher price. In order to obtain this higher price, the cartel limits the output that is expected of each member, hence assigning each member a share of the market. There is a high probability for the cartel to fail if a large number of members cheat on these arrangements (World Book, Inc, pp. 252, 2007). 5) Give two features of the collusions by the companies There are explicit collusions and tacit collusions. In explicit collusion, it is the easiest way for firms to ensure that all the profit maximizing output will be in maintenance. Such of these collusions have taken place in the past although many of them were considered illegal, whereas, one type of tacit collusion is one where the firms set the same price as an established leader (Lipsey & Chrystal, pp. 180-181, 1999). In this case, ‘the oligopolists make sure that they do not engage in price-cutting, excessive advertising, or other forms of competition’ (Sloman, pp. 51-57, 2008). 6) What type of merger is indicated by the (consolidation of seed companies)? It has become a barometric firm because there is one agricultural input industry that seems to have the best knowledge of the prevailing market conditions. There are observations that firms that are seen as barometric firms often change (OECD, pp. 40-51, 2010). Whatever the company might be, whether chemical or seeds, it may always talk about raising prices. The consolidation of Seed Company is such where the price leader is the one whose prices reflect the market conditions in the most reasonable way (Sloman, pp. 201, 2008). 7) Discuss the reason why the chemical companies would want to consolidate (merge) Globalization has lead to a lot of competition. There is a need for the chemical industries to merge and face the competition in the industry by becoming big. It will then be easier for them to compete. When there is a consolidation, there are both small and large firms present in the industry. Hence, in the short run, it is easier and a lot of benefit as the large firms brings with them a lot of capital and expertise that may result in a boom in the market. There will be consistency with consolidation as well (Brittery, 2001). However, in the end, it is possible that the larger firms would take over the smaller ones and the smaller ones would be forced to shut down. In addition, the firms would want to consolidate to acquire a bigger market share in the economy that will result in creating a monopoly in the economy. Chemical companies can go diverse if they consolidate. For instance, in the case mentioned in the article, now the agriculture industry as a whole is concentrating on all the seeds, pesticides, and the biotech area, therefore, a larger share in the market. With the advent of industrial revolution, businesses became riskier, which means that consolidation will help in covering up the costs and the losses that are made (Brittery, 2011). 8) Discuss whether the collusion would be beneficial or bad for the global economy. Give reasons for your answers. Every aspect has a positive aspect and a negative aspect. Focusing on the advantages, we can see that collisions helps in creating economies of scales, which means that the risks will now be spread over a larger area and this will reduce the costs, hence, lowering the prices for the consumers. In addition, it will be easier for firms to borrow capital and hence there will be a greater access to capital. In this way, the system will now have an access to larger skilled labor, resulting in an increase in the level of expertise (Barefiled, pp. 4-5, n.d.). In addition, they are favorable for the public in a way that the consumers might gain from relative price stability. There is a reduction in the costs of some wasteful advertising if producers co-operate instead of competing with other firms. There is a guaranteed supply by the producer cartel. However, the negativities of the consolidation are that falling demand will create and excess capacity in the industry. For example, during an economic downturn, entry of non-cartel firms in the industry. Then there is the exposure of price fixing by the government agencies (Mankiw, pp. 67, 2008).. References Barefiled, A. n.d. Consolidation Issues. Mississippi State University Press. Bianco, David P. 2011. ‘Oligopoly.’ Reference for Business. Retrieved on February 10, 2011: www.referenceforbusiness.com/encyclopedia/Oli-Per/Oligopoly.html Brittery, A. 2001. Eco Merger Concept. Retrieved on February 10, 2011: www.allbusiness.com/north-america/united-states-new-jersey/975751-1.html Leiberman, H. 2007. Principles of Economics. Cengage Learning. Lipsey, R. G., & Chrystal, K. A. 1999. ‘Types of Co-operative Behavior.’ In Principles of Economics. Oxford University Press. Lipsey, R. G., & Chrystal, K. A. 1999. ‘Oligopoly.’ In Principles of Economics. Oxford University Press. Mankiw, N. G. 2008. ‘Markets and Competition.’ In Brief Principles of Economics. Harcourt College Publishers. OECD. 2010. OECD Economic Surveys. OECD Publishing. Sloman, John. 2008. ‘Barometric firm price leadership.’ Economics. Prentice Hall. Sloman, John. 2008. ‘Collusion and the law.’ Economics. Prentice Hall. Sloman, John. 2008. ‘Oligopoly.’ Economics. Prentice Hall. Swanson, Timothy M. 2002. The Economics of Managing Biotechnologies. Springer. World Book, Inc. 2007. ‘Cartel.’ The World Book Encyclopedia. World Book, Inc. World Book, Inc. 2007. ‘Monopoly and Competition.’ The World Book Encyclopedia. World Book, Inc. Read More