Difference Between a Monopoly, an Oligopoly and a Cartel - Research Paper Example

The paper "Difference Between a Monopoly, an Oligopoly and a Cartel" is an excellent example of a research paper on macro and microeconomics. In a market structure of monopoly, there is only one firm as a seller but there are many buyers. An oligopoly market consists of a few independent firms, which compete with each other, and any new firm’s entry is impeded. A cartel is a market structure where firms are independent and some or all firms explicitly collude. In a cartel, it might seem that firms are having a monopoly.

But there is coordination among firms in terms of price and level of output with the objective of maximizing joint profit (Market Structure, n.d.) Examples Example of monopoly could be United States postal services for the delivery of first-class mail, Microsoft in an operating system. Automobiles, aluminum, steel are examples of oligopolistic industries. OPEC oil cartel, international bauxite cartel are the examples of a cartel (OLIGOPOLY & CARTELS, 2003) Welfare effects of monopolies and oligopolies In a monopoly, since there is only one firm controlling the market, both price and quantity are controlled by the monopolist.

If the firm decides to increase the price it is not required to worry about the consequences of price rise because the firm will face no competition. In a monopoly, a buyer does not actually have any alternative. We may thus conclude that a monopoly is a market where both the quantity of the final product and its price are controlled by the monopolist. In an oligopoly, all the firms in the market are able to make a significant amount of profit in the long term as there are barriers for new firms to get into the market.

Game Theory Game theory is used to have an understanding of the development and operation of a market and finding ways in which managers should be thinking about strategic decisions. According to Stanford Encyclopedia of Philosophy, the Game theory is the study of the ways in which strategic interactions among rational players produce outcomes with respect to the preferences (or utilities) of those players, none of which might have been intended by any of them (Game Theory, 1997.) A game is that situation which includes players or participants who make strategic decisions.

These decisions include the player’s actions and responses. Examples of a game could be firms who are involved in competition with each other by setting prices or it could be a group of consumers bidding against for a work of art at an auction. As a result of strategic decisions made by players, there are payoffs to the players. For firms who are competing for setting prices payoffs are profits. Determining the optimal strategy for each player is the major objective of the game theory.

A strategy is a rule or plan of action to play the game and the strategy that maximizes the player’s expected payoff is the optimal strategy. Generally, there are two types of economic game that firms are involved in, 1) Cooperative game; and 2) Non-cooperative game. In a cooperative game, players are allowed to make joint strategies by negotiating binding contracts, whereas in a non-cooperative game there is no scope of negotiation and enforcement of binding contracts.The economic purpose of OPEC OPEC is the Organization of Petroleum Exporting Countries founded by Venezuela, Iran, Iraq, and Kuwait.

It was created in 1960. Currently, two-thirds of the world’s known oil reserves are held by OPEC. The main objective of OPEC is to check the amount of oil produced and control the price of oil. OPEC makes sure that there is no fluctuation in the oil price without their knowledge and its member countries always receive a high price for selling oil. World economic growth is influenced by OPEC as it controls the supply of the major amount of oil in the world. Oil prices in the last five years Five years ago oil price was around $29.

03 per barrel. It was just after the Iraq war. In 2005 price climbed to almost $47. In 2006 it was around $65 and in the middle of 2006 and 2007 price increased to $69 because of Katrina. In October 2007 it was $80.24 and in April 2008 price reached $100.98.