Oligopoly

Discussion on “OPEC Production Cut Surprises the Market” by Stanley Reed (Business Week, September 2008)

 In Stanley Reed’s article “OPEC Production Cut Surprises the Market” published in Bloomberg Businessweek in September of 2008, Reed discusses OPEC’s unexpected decision to cut oil production and the possible causes and effects of this decision. The 30% decrease in oil prices from July to September was indicated as a driving factor in this decision. In accordance with the basic laws of supply and demand, OPEC sought to cease this fall in prices by limiting oil production. Other causes cited as contributing to the decrease in oil prices were the easing of geopolitical tensions, weakening of the world economy, and strengthening of the dollar. Reed further states that this production cut may not even be enough to compensate for the decrease in demand for oil, and the cartel may need to take further action. As a cartel oligopoly, OPEC operates using a collective decision making system—maximizing profits by making decisions together. In this scenario, Saudi Arabia symbolically agreed with the collective decision to cut production, despite having different personal opinions on the matter. This situation appropriately illustrates the in class discussion on the nature of oligopolies and more specifically the structure of cartel.

The complexity of OPEC’s operational strategy back in 2008 is made even more complex and controversial by the ethical implications of oligopolistic economic practices.  Oligopolies are often seen as unethical because they inherently undermine economic freedom that is of so much value in traditionally competitive market.  The ability of OPEC to price fix and manipulate supplies often seems unfair and wrong, especially in the United States where oil consumption is of great and vital importance.  However, the nature of the petroleum industry is that it is dealing with a limited resource that due to legal restraints is often controlled by nations rather than corporations.  Nations have many good reasons to control their natural resources, and such control is not limited solely to the petroleum industry.  It is this important consideration, that governments instead of pure businesses control oil production and supply, which makes the ethical obligations of member nations to OPEC increasingly complex.  Furthermore, the great differences in opinion of OPEC member nations that is evidenced in the article summarized above indicates that the organization is not a villainous organization attempting to exploit industries, but is often attempting to control supply of a resource that can be highly volatile but incredibly important to virtually every industry around the world. Despite the often-ill side effects of oligopolies, the nature of a vital and limited resource coupled with the unique aspect of government control means that OPEC may not be unethical in its attempts to coordinate.  This is further evidenced by its willingness to let prices drop, even though the nations theoretically could prevent such profit loss.  

A second real-world application of the oligopoly market can be seen among U.S. cell phone network providers. It is estimated that the four major carriers—Verizon Wireless, AT&T, T-Mobile, and Sprint—control nearly 91% of the entire market. The reason for this is based largely on the enormous barriers to entry that are present within the industry. Purchasing wireless spectrum and building out complex networks have enormous up front costs for anyone looking to enter and compete in the industry. Even the big players attempt to avoid these costs by simply acquiring other providers. In the fall of 2011, AT&T attempted a bold acquisition of T-Mobile in an effort to overtake Verizon as the U.S.’s biggest provider. However, as with many oligopolistic markets, regulators were quick to denounce the possible merger, stating that competition would only decrease and leave consumers with fewer choices. Nonetheless, the four major firms do still compete fiercely on contracts and various bundling packages in an attempt to woo consumers to switch carriers. This interdependence keeps the market mildly competitive, but the industry is nonetheless another great example of an oligopoly market.     

Posted by Clayton, Alyssa and Elizabeth (Section 3)

Resources:

Mourdoukoutas, Panos. “AT&T T-T-Mobile Merger Falls Apart; A Victory for Consumers.” Forbes. Forbes Magazine, 23 Nov. 2011. Web. 16 Apr. 2012. <http://www.forbes.com/sites/panosmourdoukoutas/2011/11/23/is-the-att-t-mobile-merger-limiting-or-fostering-competition/&gt;.

Wang, Gigi. “AT&T/T-Mobile Merger: More Market Concentration, Less Choices, Higher Prices.” Focus Report. Yankee Group, Aug. 2011.

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